Q: What is “private inurement,” and can it affect my business?
A: Dear Concerned:
First off, private inurement is something that only applies to nonprofits, so if you own a standard for-profit business, you won’t be affected. If you do run a nonprofit or are thinking of starting one, read on.
The IRS stipulates that a nonprofit organization is only allowed to use its income and assets to serve its nonprofit purposes, not for the private gain or enrichment of anyone who has a close relationship with the nonprofit or is able to exercise significant control over it.
Known as “insiders,” these individuals can include those who founded the nonprofit, run it, work for it, or are closely related to it in any way. The term “private inurement” refers to cases where a nonprofit’s money or other assets are used to benefit these insiders, instead of the religious, charitable, educational, or scientific purposes they were intended for.
If a nonprofit engages in conduct that results in an improper benefit to an insider, the IRS can impose monetary penalties, revoke the nonprofit’s tax exemption, or impose both fines and revoke its tax-exempt status. Most nonprofit organizations, including 501(c)(3) and 501(c)(6) organizations, are subject to the inurement prohibition.
If you’ve started a nonprofit, or are considering starting one, and want to learn more about the advantages and disadvantages of such entities, contact a Creative Business Lawyer®.