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May I incorporate for-profit and nonprofit at same time?

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May I incorporate for-profit and nonprofit at same time?

I am incorporating a for-profit corporation and a nonprofit 501(c)(3) public charity at the same time. May I be on the board of both corporations? The only business relationship between the two corporations would be that the for-profit may make a loan to the nonprofit at cost, with no additional compensation and no tax deduction. The for-profit may also give the nonprofit a gift on rare occasions. Would there be any problem with the IRS under these circumstances?

Nothing you have said here should give the IRS a problem.  Many people are involved with for-profit and nonprofit corporations at the same time.  Assuming that you own most or all of the shares of the for-profit, the for-profit would be a “disqualified person” with respect to the charity, but a loan at a fair market interest rate (which I assume is what you mean by saying “at cost”) or less would not be an excess benefit and would be fine.  A gift from the for-profit, like a gift from you personally, would also be fine.  You could get into trouble if you are using the nonprofit to funnel business to the for-profit or somehow using it to make its assets, such as intellectual property, more valuable, but it doesn’t sound like you are doing anything like that.  You just have to be sure that any economic transaction between the charity and you or your for-profit is fair and not an excess benefit.  The tax rules are reasonably clear on how to you can obtain a rebuttable presumption that the transaction is okay. (See Ready Reference Page:  “Charities Must Avoid Excess Benefit Transactions”

Tuesday, May 5, 2015

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Comments

Also be careful as to what kind of "charity" it is. If it is classified as a private foundation then even providing a loan "at cost" would likely be a self-dealing transaction prohibited by section 4941. That is a far stricter factor in that you cannot charge ANYTHING for the loaning of money - even at below cost.

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