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.”)
Sunday, October 30, 2011
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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?
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.
Thank you for this information!
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