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

Gain a better understanding of the process of transitioning a nonprofit to for-profit and protect the nonprofit from significant liabilities.

Nonprofit organizations operate under intense public scrutiny. No activity is subject to more scrutiny than a nonprofit organization's conversion into a for-profit organization. Conversions must be carefully approached and structured with an eye towards how the IRS, Attorney General and/or the public at large will perceive them.There is little room for error. This topic delivers a crash course for persons tasked with advising a nonprofit whether and how to convert into a for-profit. We will walk through the relevant legal backdrop, various methods for converting, as well as common pitfalls and traps for the unwary. Failure to properly approach and consummate such conversions can result in significant liabilities including, but not limited to, retroactive revocation of exempt status, expensive Attorney General and/or IRS investigations and excise taxes against the fiduciaries and individuals approving the conversions. This topic will ensure nonprofits and their advisors approach conversions with their eyes wide open and are able to utilize various prophylactic measures to protect them.

Runtime: 92 minutes
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Why Lorman?

Over 32 years and 1.4 million customers worth of experience providing continuing education. Our passion is providing you world-class training to help you succeed in business and as a professional.

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?

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Why Lorman?

Over 32 years and 1.4 million customers worth of experience providing continuing education. Our passion is providing you world-class training to help you succeed in business and as a professional.

Credits

OnDemand Webinar

This course was last revised on July 21, 2016.

Call 1-866-352-9540 for further credit information.

This program does NOT qualify, nor meet the National Standard for NASBA accreditation.

Audio & Reference Manual

  • Arizona CLE 1.5
     
  • CA MCLE 1.5
     
  • GA CLE 1.5
     
  • HI CLE 1.5
     
  • IL CLE 1.5
     
  • ME CLE 1.5
     
  • MO CLE 1.8
     
  • MT CLE 1.5
     
  • NJ CLE 1.8
     
  • NV CLE 1.5
     
  • NY CLE 1.5 including Areas of Professional Practice 1.5
     
  • VT CLE 1.5
     
  • WA CLE 1.5
     
  • WV MCLE 1.8
     
The CLE Code is ONLY a requirement when applying for CLE Credit in California (for participatory credit), Kansas, New Jersey or New York. Other states do not need to supply the CLE Code to apply for CLE credit.

This program does NOT qualify, nor meet the National Standard for NASBA accreditation.

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Why Lorman?

Over 32 years and 1.4 million customers worth of experience providing continuing education. Our passion is providing you world-class training to help you succeed in business and as a professional.

Faculty

John Paul Callahan

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

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]
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Product ID: 397765
Published 2016
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