Making the Switch: Converting Your Nonprofit Into a For-Profit

Agenda

The Landscape

• "Definition of Nonprofit": A Common Misnomer
• "Tax-Exempt" (Presuming Pursuant to 501(C)(3) of the Internal Revenue Code)
• 501(C)(3) of the Internal Revenue Code: The Organizational and Operational Tests
• Who Owns a Nonprofit?
• Private Benefit Doctrine
• Intermediate Sanctions: Excess Benefit Transactions and the Rebuttable Presumption of Reasonableness Safe Harbor
• Donor Restricted Assets
• Who's Watching?
• The IRS, the Attorney General, the Public
• The Courts?

Why "Convert"?

• Investors
• Excessive Commercial Activity (Unrelated Business Income)
• Succession Planning
• Onerous Operational Rules and Governance Scrutiny (Too Much Transparency?)

How Do You Convert?

• State and Federal Law Components That Need to Be Harmonized
• State Law
• 1) Form and Procedure
• 2) Interplay Between Nonprofit and ForProfit Acts
• 3) Corporate Document Amendment
• 4) Model Entity Transactions Act Conversion (Many States Exclude "Nonprofits")
• 5) Asset Sale (in Connection With Liquidation?)
• 6) Merger
• 7) Attorney General Disclosure and/or Approval?
• Federal Law
• 1) DeRecognition of Tax Exempt Status? Revisiting the Organizational and Operational Test
• 2) Default Status: Taxable Nonprofit
• 3) Remaining Basis for Tax Exempt Status and New Determination Letter?
• 4) Fair Market Value. Independent and Qualified Valuation(s).
• 5) IRS Disclosure
• Conflict Between State and Federal Law

Common Pitfalls

• No Legitimate Reason to Explore in Furtherance of the Nonprofit's Purpose
• Inadequate Documentation of Prudent and Arms-Length Due Diligence and Deliberation
• Insignificant Due Diligence
• Ignoring Tax Ramifications (Not Just Income Tax)
• "Counsel to the Deal"
• The "Goodwill" and "Public Perception" Factor
• Termination of Private Foundation Status

Alternatives?

Credits

Faculty

John Paul Callahan

Reid & Riege

• Associate in the office of Reid and Riege, P.C. and is a member of the firm’s Business Law and Nonprofit Organizations Practice areas
• Practice focuses on general corporate and nonprofit governance, preparing contracts, business formation, and business transactions including mergers and acquisitions
• While in law school, he provided pro bono legal assistance to small businesses on transactional matters typical in the start-up phase and ongoing management of their enterprises
• Member of the Connecticut Bar Association
• J.D. degree, magna cum laude, Western New England University School of Law; B.S. degree, summa cum laude, Western New England University

Edward B. Spinella

Reid & Riege, P.C.

• Partner in the office Reid and Riege, P.C. and is a member of the firm’s Business Law and Nonprofit Organizations Practice areas
• Practice focuses on providing general counsel services to tax-exempt organizations and closely held businesses
• Has cultivated a familiarity with the culture of tax-exempt organizations by regularly speaking to nonprofit executives, volunteer fiduciaries and advisors through various educational forums
• Has been an actively engaged member of the Connecticut Bar Association’s LLC Act Subcommittee and its anticipated overhaul of the Connecticut Limited Liability Company Act
• Member of the American Bar Association and the Connecticut Bar Association
• J.D. degree, with honors, University of Connecticut School of Law; B.A. degree, summa cum laude, College of the Holy Cross
• Can be contacted at 860-240-1054 or [email protected]