Can a nonprofit purchase a for-profit company and operate it as a social enterprise?

This question came up in a recent discussion on the npEnterprise Forum.  Incidentally, npE is the official listserv partner of the Social Enterprise Alliance, and, with 7000+ global subscribers, has become the global commons for the social enterprise movement. Subscriptions are free and open to all. I’m one of the moderators.

OK, back to the above question. A lawyer (Arthur Rieman) replied: “In general, an exempt org that wants to engage in a transaction such as [this] can do so provided the transaction is properly structured and documented, on the one hand, and all of the relevant IRS and Attorney General (especially here in California) regulations are heeded. Depending on the actual facts of the situation, your legal counsel should be able to guide you and the organization’s Board of Directors through the processes necessary to make the transaction sufficiently transparent and in compliance with the relevant laws and rules should a regulator come knocking at your door.”

A foundation officer (Ken Ristine) replied (edited for length): “[This topic] demands particular attention to detail regarding how you structure such a deal. The question is, do you want to expose the nonprofit to the legal consequences of [potential product or practice] liability? Are your nonprofit board members willing to accept such a risk? In both cases the answer is probably No.

“One idea then is to structure the for-profit in such a way, say as a wholly-owned subsidiary, that it has its own formal corporate structure. That structure, including a separate board, creates a barrier between the for-profit and the nonprofit regarding issues such as operations, taxation, and liability. But, if the enterprise generates profit, all or part of the profit can flow to the nonprofit.

“This example is only a small look at what you have to deal with. You really need to get together with an attorney and accountant who understand these issues to hash out the details. You may need both someone with small business experience as well as another person who really knows the nonprofit law around structuring related organizations.”

So there you have it. Yes, your nonprofit  (probably) can do it, but be sure to get good legal and accountant advice first.

Here’s a useful IRS web site on this:  http://www.irs.gov/charities/article/0,,id=96104,00.html

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