You are here

Must we get separate exemption for new subsidiary?

Your Legal Questions Answered

Must we get separate exemption for new subsidiary?

Our 501(c)(3) nonprofit wants to form a new nonprofit tax-exempt subsidiary that will engage in activities that, while related to our mission, will be somewhat different. The parent provides housing, education and supportive services to people in recovery from drug and alcohol addiction in an urban setting. The subsidiary will be a treatment center for inpatient and outpatient services, with a holistic approach incorporating things like yoga, nutrition, and natural medicine in a rural setting and using a different corporate name.  Should we get a new EIN for the new organization and do we have to file for a new tax-exemption or can we use the parent's status to fundraise for the new nonprofit? 

Unless you plan to create the new entity as a single member limited liability company solely owned by the existing nonprofit, you will have to get a new EIN and file for a separate recognition of exemption.  A single member LLC owned by a charity is considered a “disregarded entity” by the IRS and all of its activities are considered for income tax purposes as those of the parent owner.  There is no need to obtain a separate recognition of exemption for a single member LLC. 

But if the new LLC is conducting business activities that are unrelated to the exempt purpose of the parent, the resulting unrelated business taxable income could be enough to jeopardize the exemption of the parent if the parent does not expand its exempt purposes.  The LLC is a separate entity for state law purposes and for most liability issues but basically does not exist in the eyes of the IRS.  Even if you use a single member LLC, however, you will need a separate EIN if you have employees or need to pay certain excise taxes.

In view of the different character of the operations of the new entity and the intended use of a different name, it probably makes sense to set up a separate corporation and obtain a separate recognition of exemption.

In either case, you may be able to add the name of the subsidiary on the parent’s state charitable solicitation registration forms as an additional organization for which the parent raises funds, but some states may require separate registrations for each.

Tuesday, December 10, 2019
Keywords: 

Sign-up for our free weekly Q&A

Comments

With respect I think you miss the easiest way to resolve this without having the organization form a whole new tax exempt entity. They say the expanded activities are related to the Mission but are “ somewhat different”. If that is the case why not simply expand the Mission with language that encompasses the somewhat different activities. You are not seeing the forest for the trees. And UBIT??? Really?

I accepted the premise of the question, that the group wanted to establish a separate subsidiary.  There could be many reasons to do so, particularly the different potential liability and insurance requirements, different funding sources, different leadership requirements on board as well as staff, and different juisdiction in which they operate, in addition to the difference in mission.  A lot of organizations will organize separate entities for separate lines of business within a single "system."  You are correct that they probably could just expand the current mission of the parent entity, but that could cost them the protection of a separate legal entity. They appear to have made that decision on their own.  --Don Kramer

Thank you Don for your valuable insight. I am passing on your comments to the Board. With regard to the new business being "somewhat different", it will be incorporating different methods of treatment that the parent company does not engage in, namely alternative medicine, yoga, tai chi, nutritional counseling, equine therapy in addition to traditional methods of treatment. Moreover, the new company is going to have a differently worded mission statement. Both companies are still primarily dedicated to treating and combating addiction, but in different ways. I thank you again so much Don for helping us in this matter, and will discuss it with the Board of Directors. I am sure that they are going to take your sagacious advice!!

Very helpful Don. We have been considering doing much the same as the organization you commented on.

Add new comment

Sign-up for our weekly Q&A; get a free report on electioneering