Can a 501(3)(c) charity (a hospital) have a for-profit subsidiary that is taxed as a "C" Corp?
Yes. It is not unusual for a charity, particularly a hospital, to have a wholly owned subsidiary that is a for-profit organization taxed as a business under Subchapter C of the Tax Code. There have been times when Congress has considered changes in the current rules, but they have never been passed.
A charity will often use a separate C corporation to conduct unrelated business activities, pay tax on the profit, and use the remainder to support the charitable activities.
There is no problem with this scheme so long as the charity owns 100% of the stock of the C corp. Issues may arise if there are other individual or for-profit investors in the corporation. The IRS may look in those situations to see whether the charity is using its exempt status in some way to provide an improper private benefit or private inurement to the other investors.
Pennsylvania has what I believe to be a unique rule which allows a “small business” to enjoin a charity from funding or subsidizing a for-profit in competition with the small business in the same community. (See Ready Reference Page: “Act 55 Defines ‘Charity’ Eligible for Exemption.”)
Comments from our Readers
Under this premise, can an organization be a non-profit and their educational facilities, a day care and a Christian school be for-profit under their direction and management? Can they use grant money for for-profit programming? - S. Graham
The specific activities you describe could probably be done by a charitable organization. If so, it would probably not make sense to operate as a for-profit and pay income taxes on any earnings unless you couldn't proceed without investment capital and have to rely on for-profit investors to get the capital you need. It would be much more difficult to obtain grant money for a for-profit operation, although there are ways in which you might attract some grant capital. - Don Kramer
Planned giving sounds complicated, with its CRUTs and CRATs, CLUTs and CLATS, and CGAs. It can be incredibly complicated, but it needn’t be. Keeping it simple may be the best way to start a planned giving program for a charity that hasn’t already put one in place.
This webinar offered a review of major planned giving instruments and a discussion of ones that make the most sense to emphasize in starting a planned giving program. It discussed the advantages of integrating planned giving into an existing development program, targeting the best prospects, getting buy-in from the board that is likely to generate results, and setting a structure to make it all happen.
Weekly question and answer
Notice of each full edition
and its free stories
Report on 501(c)(3) electioneering
What our readers say about Nonprofit Issues
Once again you've tackled a tricky question and explained it so we all can understand the issue.--M.V.
Thank you for your informative and keen advice on nonprofit matters. I believe it's a unique and concise place to get answers to this often wispy area called nonprofit. --R.T.
Have a question?
Other ways to
Talk to the Editor
Next Conference Call:
Tuesday, June 4, 2013
Participate in this bi-monthly telephone seminar conference call and ask your questions directly to Editor Don Kramer.
Access the entire site
($9.95/24 hours, $17.95/3 months).
Full Day Program
A well-received full-day program that covers the current hottest topics in nonprofit law. Qualifies in Pennsylvania for Continuing Education credits.
Don is available for programs and speaking engagements ranging from a one-hour presentation to a full-day primer on nonprofit law. Contact us if you are interested in having him speak at your program.