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Tips and Answers to Your Questions
The Forms of Strategic Restructuring
Have you ever come across the situation of a non-profit acquiring
a for-profit S-Corporation? We are in negotiations now to do so. Any advice?
Things to watch out for? Legal issues?
Nonprofit organizations are not prohibited from acquiring for-profit entities.
This is in fact simpler than a situation in which a business wishes to acquire
a nonprofit. As with any major transaction, care and thought must be used to
protect the organization's interests. Things to watch out for include:
- Are there any relationships between individuals connected with the two
parties to the transaction (e.g. a nonprofit board or staff member who works
for the for-profit company, is an investor in it, is related to someone at
it, etc.)? Ideally you want this transaction to be between two completely
unrelated entities. If it is not, you have a potential conflict of interest
that needs to be openly addressed by the nonprofit's board, prior to any
deal being made.
- Is the purchase price fair? Nonprofit boards have a responsibility not
to make wild acquisitions or to enter high-risk ventures with their tax-exempt
revenues.
- Have you performed due diligence? Do you know what you are buying, and
any downsides to the transaction?
- Be aware that, depending upon the type of business being acquired, it may
subject the nonprofit to Unrelated Business Income Tax (UBIT). Any activity
that is not directly related to the nonprofit's exempt purpose opens up the
possibility of UBIT.
- Consult an attorney before executing any agreements. Legal advice is required
to ensure that you are protecting the organization's assets and reputation,
and are aware of all of the tax implications of your particular transaction.
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