Non-Profit developers use their for profit subsidiaries to joint venture with For Profit Developers when building Low Income Housing and............................................. several good reasons dictate their actions.
Avoid losing tax exempt status
Exempt organizations that function through a for-profit subsidiary, do so, without running the risk of losing or jeopardizing their tax exempt status. Exempt organizations in a joint venture can provide management and administrative functions and earn management fees without adversely affecting their tax exempt status. In Private Letter Rulings, the IRS has stated that where an exempt organization forms a for profit subsidiary, shares office space, equipment, facilities, supplies and other services with the its for profit subsidiary, that does not involve inuring private benefit upon the taxable subsidiary, provided they each maintain an identity separate and apart from the other.
Insulate parent's assets
A for profit subsidiary protects parent's exempt status and insulates parent's assets from liability. If the exempt organization engages directly in an unrelated business, it shall lose its exempt status, especially if substantial business is carried out and if the business becomes a dominant part of the activities of the organization. However, if the for profit subsidiary conducts the business, this covers the parent and protects it from liability stemming from the activity. A parent organization is generally not held liable for the debts and torts committed by its subsidiary.
Exempt organization wins the confidence of Investors
Creditors and investors generally feel a greater sense of comfort in investing in for profit entities, rather than in exempt organizations. Investors are guided by reasoning that in the event of insolvency of the exempt organization, creditors may not be able to file an involuntary bankruptcy against the organization. A for profit entity on the other hand, has the ability to raise capital from the market or even the general public by issuing stock.
A word of caution
The subsidiary must have a separate and distinct identity and a not be a mere arm or instrumentality of the parent. The subsidiary must be engaged in a real business and not just a sham, or else the parent exempt organization will endanger its status. It is best to have a separate board of directors in each organization and have each pay its own expenses for all its activities.
