Q: I want to open a non-profit for my theatre but I'm not sure how to handle the sublease income on a separate floor.
I lease a 2 story building for a live theatre. The theatre occupies the 1st floor. I want to create a theatre non-profit.
The building has a 2nd floor. It's not part of the theatre. Sometimes the second floor is occupied through a sub-lease which is allowed in my lease, sometimes it sits empty.
I have been including all income from the theatre and the 2nd floor as one business, the theatre business, sole proprietor.
When I do finally open the non-profit, I want to keep the theatre separate from the 2nd floor as the 2nd floor is not really part of the theatre. Would the 2nd floor income then be like... personal income? Do I need a separate business (with a business license) to handle the 2nd floor sub-leases? Do I just include it in the non-profit? (which I'd rather not do)
I'm also wondering, I purchased all the equipment for the theatre on my dime. Can I lease the equipment to the non-profit. When I sell the business, I don't want to lose my investment in the equipment.
A:
This question raises many of the big issues that nonprofit attorneys work on. You definitely should talk to a local nonprofit lawyer because there are LOTS of issues lurking here.
Issue 1: Are you sure you should be a nonprofit? One thing that a lawyer for nonprofits will probably do here is ask a series of hard questions about whether it makes sense for you to become a nonprofit. There are benefits to moving into the world of nonprofits (potential tax exemption being one of them) but there are also costs, hurdles, and drawbacks.
Issue 2: You already spotted the second issue, which is the second floor lease income. If that income were to pass into the hands of the nonprofit, the IRS would likely consider it to be “unrelated business income” which would be taxed. (I say “likely” because it’s not clear to me who is leasing the second floor from you. Is it residential space? Commercial? Artists?) And if your unrelated business income is too high, the tax-exempt status of the nonprofit could be in jeopardy.
Issue 3: You raise the issue of potentially needing a business license for the second floor lease. You might. Is it residential space? Industrial? Check with the city depending on what activities are going on there.
Issue 4: Part of the discussion you have with a lawyer should include the difference between a public charity and a private foundation. Some of the rules for staying legal are different depending on which of those you are
Issue 5: Leasing the equipment is one such issue. If the nonprofit falls into the category of a private foundation, your question about leasing the equipment to the nonprofit is almost certainly something called “self-dealing.” That would be a problem regardless of how much you charge. But even if you are a public charity, you’ll want to be sure that the amount you charge for the equipment is reasonable, or you run the risk that those payments are considered “private inurement” to you.
So… (1) think carefully before going nonprofit, (2) you should probably separate the second floor income from the nonprofit income, (3) be careful leasing the equipment (if you create a public charity) and do not lease or sell the equipment (if you create a private foundation.)
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