Full question:
Can a nonprofit and a for profit, owned and run by the same Board, legally exist if the nonprofit will train ex-offenders job/life skills, and the profit becomes their 'employer' as contract personnel(1099)? It will be sales positions. By the way, the nonprofit which currently exists is a faith-based 501c3. The for profit has not been recreated yet. If it is legally sound, what is the IRS business designation for the for profit?
- Category: Taxes
- Date:
- State: California
Answer:
Tax-exempt organizations, such as your faith-based 501(c)(3) nonprofit, are generally exempt from federal income tax. However, there are concerns regarding potential abusive tax avoidance transactions (ATATs). These transactions can involve tax-exempt organizations being used by for-profit entities in ways that may violate tax laws.
It's crucial to ensure that the nonprofit and for-profit entities operate independently and do not engage in transactions that could be deemed abusive or non-compliant with IRS regulations. If the nonprofit is training ex-offenders and the for-profit is hiring them as independent contractors (1099), this arrangement may be permissible as long as it complies with relevant laws and does not constitute a listed transaction, which the IRS identifies as potentially abusive.
Regarding the IRS business designation for the for-profit entity, it would typically be classified as a standard for-profit corporation or LLC, depending on how you choose to structure it. You should consult with a tax professional or legal advisor to ensure compliance with all applicable laws and regulations.
This content is for informational purposes only and is not legal advice. Legal statutes mentioned reflect the law at the time the content was written and may no longer be current. Always verify the latest version of the law before relying on it.