Legal Structure Issues: Steps in the Decision Process

Legal Structure Issues: Steps in the Decision Process

to Form a Subsidiary for the Digital Story Station

Overview

As Media Arts Center San Diego, a nonprofit, tax-exempt corporation, prepares to launch its new business venture, the Digital Story Station (formerly The Lab), several tax, corporate, and other issues in the legal structuring of the business venture must be considered. Questions which must be answered include:

(1) Under what circumstances can and should a nonprofit, tax-exempt corporation carry out a business venture internally?

(2) When is it appropriate to form a for-profit or nonprofit subsidiary?

(3) If a subsidiary is formed, what is the relationship between the parent corporation and the subsidiary?

(4) If private parties are involved in the venture, how should the relationship with the nonprofit corporation be structured?

To assist in answering these questions, this guide has been organized into four steps. Steps one through three will help in determining whether a subsidiary should be formed for the new business venture. If a determination is made to form a subsidiary, step four will help determine the subsidiary's legal form.

Step One: Review Incorporation Documents

Articles of Incorporation

A business within the nonprofit corporation must be consistent with the general or specific corporate purposes. If the business activity is not authorized even generally, the articles must be amended and filed with the next IRS Form 990 and FTB Form 199.

Media Arts Center San Diego included the following corporate purposes in its Articles of Incorporation:

(1) Educational outreach,

(2) Promote media careers,

(3) Provide current media trends,

(4) Workshops, festivals, seminars, and

(5) Distribute local media.

Bylaws & Mission Statement

If the Articles of Incorporation are amended, corresponding changes need to be made in the Bylaws and Mission Statement. Amendments to the Bylaws must be sent to the IRS and FTB with the next tax filing. The mission statement and other documents internal to the corporation need not be sent.

Tax Exemption Application & Determination Letter

Determine whether the business activity contradicts statements made in