Legality of turning a non-for-profit business into a for profit business?

I came across a business that started almost 20 years ago as a non-for-profit (NFP). Think of it like a goodwill for electronics – they resold stuff that could be saved and scraped stuff that couldn’t. From what I’ve seen the vast majority gets scrapped, there’s too much to be able to sell to be honest, at least in local markets, and I was amazed at the quality of the stuff that is donated.

When I’m talking about donations, I’m not talking about a person dropping off an old computer, it’s often businesses turning in a truck load, or a school or something. Individuals also turn stuff in but I’m guessing a lot of the good stuff comes from businesses b/c they’ve already “paid” off the equipment b/c of depreciation/amortization and it would cost more for them to try to sell it than giving it away.

So they get a lot of stuff that they can turn around and sell for good money. Now this works out well especially if the scrap is handled correctly,.

There is an option of recycling the plastic but it would cost “too much”, even though 95% of the work force is volunteer. They would have to separate the plastic, not too hard a task. So it gets land filled from what I hear – and there is A LOT of it.

I found that the business is no longer a NFP and hasn’t been for a while, but they use the same letter head, name, website (.org), and everyone who donates stuff I’m sure thinks it’s an NFP which is why they give good stuff to them to resell, there are other places around that are true NFP’s they could go to. This company is keeping that part quiet (not being a NFP anymore). I found out by asking about grant writing and was told not to bother but they made it sound like they were working on getting their NFP “license” back – which I was told is almost definitely not the case by a couple employees. So, it seems really shady.

The owner is the son of the person who started this place (and they have A LOT of donated stuff, a huge warehouse). They’ve stocked up on their liabilities (stuff that would cost $ to recycle) probably since becoming private – so I’m wondering how much $ has been drained from this place since it became private and how much liabilities they have racked up in warehousing “waste” and not paying to dispose of it.

When I looked into business law about NFP’s, it was explicitly clear that you can not start a business as an NFP and then change it to a sole proprietorship or an LLC, especially if you build the business on donations and free labor (which is exactly what happened here). It should be obvious why. Now IDK if there is a little wiggle room b/c his parent started the company, but it doesn’t seem like it should. There should have been a board of directors that decided how much to sell the business for and everything related to this. If that didn’t happen, everything should have been liquidated and a new entity formed, not running the same business name, making it seem like it’s the same business.

I talked to someone at the DEP & EPA a few weeks back about recycling businesses and this type of thing is exactly what they were saying is their biggest problem – well one of them – on the business side it is at least. Businesses incurring huge liabilities while siphoning off profits, then they leave a mess behind after they go bankrupt or whatever. An example is recycling CRT TV’s/monitors, where they accept then, strip the recyclable stuff and leave the leaded glass, which is comparatively expensive to process. The companies also often charge a $5-30 drop off fee for the CRT, so they make good money on that – then when they close up, there’s a building full of “toxic” glass products that have to be processed somehow. This place doesn’t take CRT’s anymore at least.

So I’m wondering if anyone has any experience with NFP’s and what they think of the situation I explained.

-Edit - The company is still operating under the premise that it is a NFP. Paperwork for new employees and volunteers state that the entity is a 501.C.3 and there are still signs up that would indicate the same. I would think that they would have to cease accepting donations and volunteer work on the premise that they are a NFP as if they don't, it is fraud, IMO.

I found this on legal zoom and it covers the topic pretty well.

info.legalzoom.com...

Have you looked it up? If they are a 501(c)3 organization then they will be registered.

The way I understand it is you must first dissolve the NFP business and re-establish as a FP business under a new operating license because it changes the business' tax status.

originally posted by: schuyler
Have you looked it up? If they are a 501(c)3 organization then they will be registered.

Thank you for the suggestion. That was a good idea. I didn't think about there being a list or it being searchable. I found that it is listed with the state as a charity and with the IRS, but with the IRS it shows revocation of status some time ago. I looked at the reason for revocation and the form that needs to be completed and on it asks if there are any changes to the business (address, name, etc) and I'm wondering if this is the last form that wasn't sent in after the son took over. The revocation is around the same date as an extension from when the form was originally due, so I'm wondering if it is because they didn't know how to answer all the questions about transferring the assets to the new owner, or if it is a sole prop because they didn't fill out the form which revoked their status - chicken/egg situation because I didn't find out when the ownership changed or why yet.

originally posted by: TheTruthRocks
The way I understand it is you must first dissolve the NFP business and re-establish as a FP business under a new operating license because it changes the business' tax status.

Yes, that is pretty much the case, BUT there is a HUGE issue related to this and it is the distribution of assets - everything that was collected or donated, and from what I was told, was everything in the building related to the business for the most part - of course they weren't explaining to me in detail every item, but it was my impression from what was said.

Here's what is said about assets:

From legalzoom:

info.legalzoom.com...

When a nonprofit organization dissolves, the assets must be distributed to another nonprofit organization. The articles of incorporation may specify which nonprofit organization or agency will receive the assets. If not, it will be up to the board of directors to choose a recipient. Nonprofit assets may not be distributed to any individual or for-profit entity.

a reply to: DigginFoTroof

You know there is a reward for turning in tax cheats.

www.irs.gov...

Correct me if I'm wrong, but I seem to remember you talking about being in the industry.

(Bidding on and selling used hardware.)

Are you trying to take down the competition, or personal problem with the company?

That's an awful lot of snooping on your part.

Not really cool, if this is the case.

Help me understand your motive here dft.

originally posted by: Mandroid7
Correct me if I'm wrong, but I seem to remember you talking about being in the industry.

(Bidding on and selling used hardware.)

Are you trying to take down the competition, or personal problem with the company?

That's an awful lot of snooping on your part.

Not really cool, if this is the case.

Help me understand your motive here dft.

You are correct in some instances. I talked about auctions but the ones w/n the last 10+ years weren't related to this stuff at all not even the same field. I used to work with computers some time ago. I contacted the company b/c I thought they were a non for profit and a group I'm in is as well and there is over-lap in our interests and it is possible that the two groups could benefit each other, so I contacted them because of that.

Non of this wouldn't have come up if I hadn't suggested them looking into some grants b/c there are a bunch right now that would be helpful to them - I just found this out today, but I've known how the company operates and had various contact with them for the last 10+ years, so it was a little bit of a shock to find out their situation and I'm not sure they even know it's a problem TBH.

a reply to: DigginFoTroof

Right on, so you are trying to help them?

Carry on, I know jack-all about non profit structuring, sorry.

There is no such thing as a nonprofit business. In reality, the people running it always get something out of it. Even if it isn't easy to pin down what it does for them. It makes them go.

originally posted by: BrianFlanders
There is no such thing as a nonprofit business. In reality, the people running it always get something out of it. Even if it isn't easy to pin down what it does for them. It makes them go.

Yeah, but the classification really restricts how the assets and operations are handled as well as what kind of assistance the company is eligible for.

a reply to: DigginFoTroof

You don't think about much before you post these threads, in general. Every single one you're asking us to do your own research for some grand idea or grievance.

So I did a little looking into the laws regarding this and found some very worrying things, one being that the "organization" hasn't filed their 990 (yearly tax document) for over 5 years, which is why they were revoked. I looked at their prior 990's and there is a lot of problems with them as well, like not declaring where their largest expenses are being spent, just the amount - so it could be going back to a board member, employee or something, it just shows 25-50% of their revenue being spend on "blank field" - which is supposed to list who (person or company) receives this payment.

They are also listing huge amounts of "debt repayment" in the form of interest, late fees, penalties, etc, to an unknown financial institution of debt holder - basically service fees on a loan - even though they list no loans or debt, except for a very small 200-500 listing about 10 years ago. So it basically shows money is being spent on an unknown loan and doesn't list who is receiving these large payments ($50K+).

Then there is the problem that people are donating large amounts of goods and taking a tax deduction because they are still using their 501.c.3 EIN, so people are commuting tax fraud by taking this deduction based on the fraud this organization is perpetuating to their customers. So if someone donates $10,000 of goods and they take that as a deduction on their taxes, that is actually tax fraud on the customer's part and they will get penalized for this if audited.

I read reviews of this company on facebook and google reviews and almost all of them were 5 star or 1 star, and all the 1 star were basically the same. These people who gave one star were treated horribly and were snapped at when they asked questions about donations and deductions, which makes sense. Many people sought to go elsewhere. They also listed that they were "yelled at" (yes that was said 4-5 times) when they looked at equipment at the front of the store, sitting out on tables, because it is the drop offs, but it isn't labeled anywhere as such, so people think it is like everything else in the store, for sale.

There was also talk about very expensive items donated that never showed up for sale in the store (it doesn't go anywhere else). Some people donated to get the deduction and told other people it would be for sale, because they were interested in it and it would come with a warranty from the store. It never showed up for sale and the people who wanted to buy it were told that no such items were ever donated (yet there are reciepts of such donations). So that is worrying.

There are about 10 other issues like those above, many of them even worse, but b/c they are more technical as per 501.c.3 and tax law, it is tough to explain. I really would like to work with this business but I don't know if I should ask the "owner" (a 501.c.3 doesn't really have an owner, but that is a different story....) but I get the feeling I'll loose any access to find out what is really going on. I'd rather help him if it is possible to get things back to non-revoked status, but IDK if that is even possible or a good idea after reading some of these reviews and hearing some things from employees.

I'm shocked that this is only an IRS issue and doesn't have anything to do with local law enforcement. I would have thought operating a fraudulent business would fall under some kind of legal statute where police could act, but from what I have found, it seems that only the IRS would be involved - maybe the IRS then beings charges or something, IDK.

With April 15 coming up quickly, that will be the 5th or 6th year that all the donors will be commiting tax fraud by claiming deductions for items donated to this organization. They have also made it impossible to find any board members or directors, which isn't allowed as per 501.c.3 rules.

So what I have found is that for anyone working with a non profit, you really need to do some background checking on them, especially if you are going to be giving them money or donations you claim on your tax filings.

Here is a link for anyone to search to see the current status of a charity

apps.irs.gov...

Here is a site that will allow you to view old 990's to see how their money is spent - if they are paying a CEO or President $1 million a year in salary, or paying 90% of their income to employees, or something like that. you can see how much is actually being spent on the cause.

projects.propublica.org...

originally posted by: hombero
a reply to: DigginFoTroof

You don't think about much before you post these threads, in general. Every single one you're asking us to do your own research for some grand idea or grievance.

And you don't think much period, or just can't think very well. I'm still waiting for a thread by you that is of interest to anyone on this board. The only thread you created that had any type of response was a whiny cry for help where you complained about how horrible your life was and you were seeking sympathy. You stalk me and post the most useless comments. Some of my posts might not reach your level of importance or background research, but there is reason for that and it isn't b/c I'm asking people to do my research, but trying to find people who might have knowledge of the subject or even work in the field. This is a very diverse group of people on this board, we even have troll whiners like you to round out the board - it takes all kinds.

So why don't you stop coming into my threads and go find another hobby. I'm sure you've learned a lot from my threads, maybe even started to master the English language, so at least there's that. Now scurry off.