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You are of course absolutely correct. Nonprofits MUST make a profit. The only difference is that such profit is reinvested back into the organization instead of being distributed to owners.

As to what the IRS considers to be related vs. unrelated business income, it is good for everyone to be familiar with the various IRS publications that deal with nonprofits. They explain in detail what the parameters are, and if anyone reading this is a board member and has not read those publications, are you REALLY a board member or are you just impersonating one?

Regarding freight.... I know of some non-profits that do move freight regularly. So it can be done somehow.

A nonprofit can own a for-profit business but not the other way around. In very general terms, the revenues earned by the for-profit go to the nonprofit to advance their mission. There are IRS rules that govern startup, acquisition, investment, etc. so if this is something you’re thinking about, do educate yourself first and get legal and accounting advice.

Oh interesting. So a nonprofit railroad museum can own a for profit freight railroad?

So a nonprofit railroad museum can own a for profit freight railroad?

Mr. Zeph,

I happen to know of at least two- one in Tennessee, and one in Connecticut, both reasonably successful.

Howard P.

In some instances, the freight operation owned by the non-profit can be bigger than one might expect. Some clues in this short article from 2015 about TVRM and some of its freight operations:

https://www.chattanoogan.com/2015/11/12 ... -Year.aspx

Howard -

The non-profit Indiana Railway Museum in French Lick, Indiana owns the common carrier Dubois County Railroad.

Les

“Non-profit is an income tax regulation and is not a business plan.”

~Unknown

A non-profit can own almost any for-profit firm, and certainly their stock and bonds. This is routinely done through an endowment, where some of the largest "non-profit" universities own billions of dollars of stock, and don't hesitate to pressure the firms for higher dividends or other actions.

One caution about a non-profit organization owning a for-profit firm is to remember to keep the two completely separate on the books. Each needs it management and board, etc. Yes, they can be the same folks, but you need to keep their actions apart. For example, the salary of the train crew will need to be split between the two operations. Other costs need to be clearly assigned, etc.

When I've done some consulting work in these cases, I kept detailed records of which firm was getting the benefits and it was billed clearly that way. It can be a bit of a pain, but there can be some nice benefits.

Bart

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"One caution about a non-profit organization owning a for-profit firm is to remember to keep the two completely separate on the books. Each needs it management and board, etc. Yes, they can be the same folks, but you need to keep their actions apart."

This may be an opportune time to point out that the particular cautions affecting "a non-profit organization owning a for-profit firm" are not confined to successful navigation of the IRS Code. While various comments in this and related discussion threads offered from that singular perspective may be valid as far as they go, corporations should probably not be looking to accountants for legal advice (and vice versa).

A defining characteristic of a corporation (of various types) is the insulation (to various extents) of its owner(s) from liability for corporate acts or omissions. Where, however, the distinction between corporation and owner is a mere sham and one is thus the alter ego of the other, courts can "pierce the corporate veil" and impose liability on an owner for such things as the corporation's negligence (think about a grade crossing disaster involving multiple fatalities, for example). It would make no difference that a railroad is found to be the alter ego of a group of investors with deep pockets, or that of a non-profit railroad museum organization whose attachable assets are whatever it owns.

While identical boards of directors are not necessarily conclusive of one organization being another's alter ego, such a situation might be some evidence of it, and could also increase the likelihood of sloppiness in other respects ("Ok, that's it for the museum stuff for this month's board meeting; now let's turn to the freight business"). There may also be issues of accountability where the boards are identical, or practically so. Also, corporate directors' fiduciary responsibilities include their duty of loyalty to the corporation; query how identical boards of directors resolve this in the event of divergent interests between two different organizations.

Besides not confusing compliance with the IRS Code with satisfying the corporation laws of your particular state, a "museum" organization owning a "railroad" organization (regardless of the status of either for federal income tax purposes) may want to pay particular attention to risk-management strategies (ranging from having appropriate insurance coverages, to possibly vesting ownership of valuable "crown jewels", real estate, or other assets in yet another entity.

I know of a large regional bank chain that is wholly owned by a nonprofit and as far as I know is the nonprofit’s only source of income, and the nonprofits purpose is to own the banks and distribute the profits to other charities.
I’m sure the bank executives get paid very well! And it’s been this way for over seventy years!
So I would guess that as long as part of your purpose is to own a for profit company to advance your other goals that it’s ok.

I am not talking about becoming an expert, but having a basic level of understanding is certainly possible. Board members should know enough about the IRS regulations to be able to raise a red flag if they hear of something that doesn't sound right or to be able to know the difference between UBI and program services revenue. I'm certainly not advocating that board members must take 2 years of college level courses on charitable tax law!

The IRS actually makes it easy to gain that basic level of understanding. Publication 557 is not too difficult to understand and the IRS has workshops to help people gain understanding of the regulations. https://www.stayexempt.irs.gov/ There are even Youtube videos on nonprofits and tax exemption.

There is no excuse to not have a basic understanding of how your organization's tax exemption works.

Many large for-profit firms are owned by non-profit organizations. They produce the funds for the charity operations. How about an example - Rolex is a Swiss luxury watchmaker owned by the non-profit Hans Wilsdorf Foundation.

There are lots more examples online....