Q: Can my nonprofit give to my small business if they are related?
I have a animal welfare nonprofit where I raise money for animals shelters and sanctuaries and we advocate for a vegan lifestyle. Instead of me taking a paycheck can I have the non profit give my vending machine business donations since I only put vegan items in my machine. The money would be used only for the business?
A:
Probably not. I assume from your description of the nonprofit's mission that this is a 501(c)(3) and is incorporated in California as a charitable public benefit organization.
This is an example of what the IRS would call "private inurement." An organization can only be a 501(c)(3) if "no part of the net earnings" of the organization "inures to the benefit of any private shareholder or individual." Private inurement occurs when the assets of a nonprofit are given to a small business owned by somebody who is involved in running the nonprofit. The State of California also takes the position that any assets of a charity are held in trust for the charitable purpose of the charity, and giving those funds to an insider's business would likely cause troubles for the organization.
If the organization is a "public charity" as opposed to a private foundation, the charity can pay reasonable compensation to you for your services running the charity. If, however, the nonprofit is considered by the IRS to be a private foundation, then any payment of compensation to you as an insider would also be a legal problem called "self-dealing," which can result in significant penalties for you and for the nonprofit.
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