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Should we stop fund transfers to for-profit studio?

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Should we stop fund transfers to for-profit studio?

I sit on the board of a 501(c)(3) nonprofit dance group that produces ballet performances throughout the year, offers training and scholarships for dancers, and provides free show tickets to veterans. Our parents pay a participation fee and we fundraise to cover the balance of our costs.

We support a for-profit dance studio, the owner of which sits on our board as a non-voting member. We pay some of her faculty, rent, and additional fees for her services. She wants us to supplement her expenses even more and has recently transferred money directly from our organization’s account to her studio account.

Our treasurer is ready to revoke any account access, as she feels this is a form of embezzling. Can you please provide any insight?

Sounds like your treasurer should revoke that access yesterday.  It is hard to imagine where the studio owner got the authority to transfer charity funds unilaterally to her for-profit company without a board decision that it is appropriate to do so.

Charities can get into serious tax trouble if they are tied too closely to for-profit organizations and use their charitable funds to help entrepreneurs make a profit.  The IRS is even more suspicious when the for-profit owner sits on the charity’s board and has a direct channel to her peers.  Even though she is not a voting member of the board, she may still be a “disqualified person” because she is in a position to have substantial influence over the organization.  Taking additional funds, without a determination that the payment is appropriate and for adequate consideration, even if it isn’t a crime, may well be an “excess benefit” subjecting her to the tax personally.  I would ask for the money back immediately and ask the board to reconsider its relationship with the owner.  It may be time to develop relationships with other studios in your community.  From what you have said, it sounds like this owner has abused the trust with your organization.

Tuesday, December 24, 2019

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