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Real estate invoice for non-profit organizations

most nonprofits out there are pretty small in fact over 75 percent of them bring in less than 50 000 per year but there's still tens of thousands of non-profits that bring in the big dollars and many of those organizations own property and with property comes risk today i'm going to talk about a great way for nonprofits that own property to reduce risk and that's with a 501c2 [Music] hi this is greg mcrae founder and ceo of foundation group and welcome back to our 501c3 university channel so everybody's heard of a 501c3 but what's a 501c2 the irs calls it a title holding company for single parent corporations now that's a wonky label for sure but it's a great description of what this non-profit does this terminology won't make sense to anybody unfamiliar with the structure so here's some key facts to qualify for a 501c2 status a non-profit must be a corporation must be wholly controlled by another tax-exempt organization often a 501c3 or c7 must apply for irs status using form 1024 and must hold title to real estate personal property and or intellectual property and finally must pass net revenue if any on to the parent organization these five attributes are the minimum necessary factors to qualify for 501 c2 status another big factor is that 501 c 2 organizations they're not allowed by the irs to have any active programs of their own that's none zero nada it's not a charity it's not a club in fact the 501c2 doesn't really do anything but what the label says hold title to property 501 c2s are allowed to collect rent from property tenants if there are any but that's it and even then the 501c2 has to pass through the netrip proceeds to the parent organization at least annually all right i can hear you now greg i thought you said this was about reducing risk i'm getting there but i had to lay some groundwork first now let's imagine a scenario shall we it's june in beautiful centertown ohio and centertown little league is a local 501c3 baseball club now the club has grown like crazy these last few years and now owns a multi-field baseball park of its own during baseball season all of the fields are in use nearly every day good stuff right we're talking kids here so you know there's going to be some bumps and bruises occasionally but nothing bad has happened in the past six year history of the club that is until the day a spectator breaks her leg when she falls through a rotten board on the bleachers within weeks a negligence lawsuit gets filed and the club fears its insurance coverage won't be enough to settle the suit the club doesn't have much cash to speak of so the facility is the only real asset of value there's a very real chance that centertown's facility can be at risk the strategic use of a 501c2 could help in this situation instead of holding title to the property directly centertown could create a separate 501c2 subsidiary that it controls and place the property into the new title holding company in the same injury scenario centertown might still face a negligence lawsuit but the property would be much harder to attach to in a judgment technically the property is owned by the 501c2 and is not seen as an asset of the 501c3 even though the c2 is subordinate to the c3 you can substitute youth baseball with any number of other scenarios a non-profit daycare a college fraternity with a frat house a private school or a church seriously i would recommend every single one of those organizational types to put their property into a 501c2 all of them could use a 501c2 title holding company to significantly reduce the risk exposure of the most valuable asset they own their real estate let me be clear this is not and i repeat not a magic bullet i'm talking about risk reduction here not risk elimination you still need insurance you still need to exercise care and caution with all of your activities there are certainly scenarios where the property it might still be at some level of risk but adding separation between your 501c3 programs and your property is one more tool in your arsenal of risk reduction look i'm a big advocate of setting up a c2 as part of an overall risk management strategy it's cheap insurance if you're interested in exploring this option for your nonprofit give us a call we set up these for folks all the time so we would love to be able to help you there's way more to 501 c2s than risk management in coming weeks we'll take a look at other uses for 501c2 including the potential to lower annual minimum distributions for private foundations we'll also explore the rental income angle a bit more there's some really important considerations about rent and possible taxable income so stay tuned for those but that's it for today if you liked this video please click the like button subscribe if you haven't already and don't forget the bell icon to be notified of future videos when we post them thanks for watching and we'll see you next time [Music] you