Who is responsible for fraud in a Non Profit Organization?

limitations on control of a non-profit organization by a for-profit corporation

• The basic question - can a private, for-profit corporation (specifically, a 501(c)3 organization) set up and control a non-profit corporation (one that interacts significantly with that for-profit corporation - i.e., purchasing a significant amount of supplies from the for-profit, etc.)? I don't need a lot of opinions about whether or not they *should* be able to - I need as much information as possible on any specific legal limitations placed on a non profit corporation being controlled by a for-profit corporation, especially when it also then interacts with that corporation. There are both state laws and federal laws that concern corporate governance of non-profits. What I'd ideally like to see is a list of the laws (both state and federal) that have some impact on the interaction of for-profits and not-for-profits, and quotes from the legislation, indicating the specific limitations, if any. I am interested in all states, and would like to have as many state references as possible, but I'm especially interested in NJ, CO, FL and TX (TX and NJ being the most important). Other general references to this particular issue in non-profit management would also be useful, (for instance, if certain organizations that support non-profits had restrictions on such arrangements) but the specific legislation citations are the most important.

• Answer:

  Hello and thank you for your question. I have written my answer in two parts. ---------- Part 1: Establishing the not-for-profit entity. As your question implies, your for-profit corporation can lawfully organize a not-for-profit entity under the laws of New Jersey, Colorado, Florida, Texas or for that matter any US state you choose. New Jersey: TITLE 15A CORPORATIONS AND ASSOCIATIONS NOT FOR PROFIT http://www.njleg.state.nj.us/cgi-bin/om_isapi.dll?clientID=478400&Depth=2&depth=2&expandheadings=on&headingswithhits=on&hitsperheading=on&infobase=statutes.nfo&record={4B42}&softpage=Document42 In New Jersey, the not for profit corporation cannot issue shares, so technically it will not be owned by your company, but your company will choose its officers and directors. http://www.njleg.state.nj.us/cgi-bin/om_isapi.dll?clientID=478400&Depth=2&depth=2&expandheadings=on&headingswithhits=on&hitsperheading=on&infobase=statutes.nfo&record={4B54}&softpage=Document42 Since all non-profit entities, no matter what state you use, are not permitted to pay dividends or otherwise inure benefits on their owners and operators, this is a distinction without a difference. Texas (here you can issue shares or not, as you please): TEXAS NON-PROFIT CORPORATION ACT http://www.capitol.state.tx.us/cgi-bin/cqcgi?CQ_SESSION_KEY=YOBXCAVLWDHX&CQ_QUERY_HANDLE=125712&CQ_CUR_DOCUMENT=1&CQ_TLO_DOC_TEXT=YES Colorado http://64.78.178.12/cgi-dos/statdspp.exe?W&srch=%27%27+AND+%27corporation%27+AND+%27nonprofit%27&i=0&cat=FFFFFFFFFFF800&r=10&s=20425&cr=10 Florida http://www.leg.state.fl.us/statutes/index.cfm?App_mode=Display_Statute&URL=Ch0617/titl0617.htm&StatuteYear=2002&Title=%2D%3E2002%2D%3EChapter%20617 ---------- Part 2: Protecting the new entity's Section 501(c)(3) tax exemption The essence of your question is whether business transactions between the new entity and your company will violate the provisions of the Internal Revenue Code. The most important of these are those that prohibit excess benefit transactions, that is, penalties that the Internal Revenue Service imposes when individuals associated with a tax-exempt organization receive compensation or benefits that exceed the value of services, goods, or donations they have provided the organization. GuideStar http://www.guidestar.org/news/features/int_sancs.stm Please read the above citation carefully, and also the two articles that it links to: "Steven T. Miller, director of Exempt Organizations at the IRS, has written an analysis of the intermediate sanction regulations. It is available on the IRS Web site at http://www.irs.gov/pub/irs-utl/m4958art.pdf "A thorough discussion about intermediate sanctions, including examples of what is and is not an excess benefit transaction and who is and is not considered a disqualified person, precedes the temporary regulations in the Federal Register. The discussion and the regulations are available on the U.S. Government Printing Office Web site at http://frwebgate.access.gpo.gov/cgi-bin/getdoc.cgi?dbname=2001_register&docid=fr10ja01-31.pdf (The document may take a few minutes to load.) Much of this material addresses the compensation levels that tax exempt entities are permitted to pay, but the same argument applies to the value of goods and services that the tax exempt entity purchases from your company. The underlying issue is the prohibition on "inurement" which is the legalistic term that applies to a charity that would benefit your company (in this case) in a manner that would be inconsistent with its charitable purpose. PRIVATE BENEFIT AND INUREMENT http://sago.tamu.edu/soba/TaxManual/Prvinur.html 501(c)(3) Do's and Don'ts http://members.aol.com/irsform1023/status/dodont.html IDENTIFYING ABUSIVE TRANSACTIONS INVOLVING SECTION 501(c)(3) ... http://www.irs.gov/pub/irs-utl/part2c02.pdf Excess Benefit Transactions for 501(c)(3) and 501(c)(4) Tax ... http://www.t-tlaw.com/lr-09.shtml So based on the above, the answer to your question is that your company will be able to engage in business with the tax exempt entity, but only on terms and at prices that it can defend as being proper in relation to the goods and services that it provides. Again, please read the material cited above, bearing in mind the sort of intercompany tranactions that you are contemplating. Of course, this answer does not constitute legal advice that you can rely on, but it should provide you with the answer you seek. Search terms used: "State Corporate Statutes" "501(c)(3)" sanctions inurement "501(c)(3) Sincerely, richard-ga