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May I convert charity to for-profit?

Your Legal Questions Answered

May I convert charity to for-profit?

I am interested in converting a financially struggling 501(c)(3) nonprofit to a for-profit. My idea is to continue the mission of the organization but operate as a for-profit. Is this possible?

It isn’t permissible under the federal tax law to simply “convert” a charitable corporation to a for-profit. A for-profit could acquire all of the assets of the nonprofit and continue the operations in the acquiring entity, but it would have to pay the fair value of the assets to the charity. The charity would then dissolve and distribute its funds for charitable purposes or remain as a grant-making foundation. That’s what happened with many charitable hospitals that sold their assets to for-profit hospital companies in the last 15 years.
The primary reason for many of those hospital conversions was to obtain access to capital that was more available in the for-profit world. If your problem is capital, you might seek help from grantmaking foundations. But whether you stay nonprofit or sell and convert, you will need a business plan that generates sufficient revenue to stay in business. If you have a good business plan, you might be able to take the capital that would be necessary to buy the assets and use it to jump-start the charity into a self-sustaining mode of operation. 
Tuesday, February 9, 2010

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