It is common for a new nonprofit to draw on the experience of its founders. Is there any reason that a nonprofit can not provide consulting services? If the new nonprofit seeks to obtain tax-exempt status under 501(c)(3) there are a number of pot-holes to avoid, based on a recent ruling by the Sixth Circuit in Asmark Institute, Inc.
● The fact that the new nonprofit is a successor to a for-profit “weighs heavily against exemption”
● The sale of services, including consulting services, is commonly considered to be a non-exempt, commercial purpose. B.S.W. Group, Inc., 70 T.C. at 358
● Listing anticipated income solely from fee-based operations and no revenue from grants, donations and fundraising operations indicates an expectation that commercial profits will be the main source of income sustaining the ongoing operations
● Performance based compensation allowing officers’ salaries to increase as the nonprofit’s activities increase
● Improvements to real estate that are not owned by the non-profit but which instead ultimately benefit a for-profit entity can count as private inurement. See Tex. Trade Schl. v. Comm’r, 30 T.C. 642, 646-47 (1958)
● Revenue sharing arrangements with other nonprofit organizations and for-profit organizations may trigger private inurement questions
The United States Court of Appeal for the Sixth Circuit upheld the denial of federal income tax exemption for an organization that described its purpose as a resource center for compliance materials for the agribusiness industry. See the following link for the decision.
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