May a 501(c)(3) public charity guarantee loans to a for-profit company?
It depends on the exempt purpose of the organization and the purpose of the loan. In general, a charity may not use its assets for the private benefit of individuals. An educational charity, for example, would probably not be permitted to guarantee a loan to the board chair’s private law firm because there is no clear charitable purpose, and there is significant private benefit, in doing so.
But an organization formed to promote economic development in the community could probably guarantee a loan to start a new for-profit business in a low-income area. Micro financing, i.e. direct loans, to minority or woman-owned business and to low-income people in underdeveloped foreign countries has been recognized as a significant charitable activity and perfectly permissible. Guaranteeing a loan to a for-profit fast food subsidiary that is set up to train participants in a job training charity would normally be permissible.
If guaranteeing a loan to a for-profit promotes the charitable mission, it is likely to be ok. If it is outside the purpose of the charity, it could jeopardize the organization’s federal tax exemption. And in Pennsylvania, upon challenge by a small business in competition with the for-profit for which the loan is guaranteed, it might be enjoined. (See Ready Reference Page: “Act 55 Defines ‘Charity’ Eligible for Exemption”)