Generally, there are not many restrictions on for profit entities (either limited liability companies or corporations) regarding the activities conducted, so long as such activities are not illegal.  For profit entities generally sell goods or services to the public and it is anticipated that those individuals or organizations that own such for profit entities will benefit in some way from the operation of the entity’s business.

However, with nonprofit entities, there are strict restrictions on benefits accruing to individuals or organizations.  Specifically, 501(c)(3) public charities are required to offer programs which benefit the entire public.  Treasury Regulation 1.501(c)(3)-1(d)(1)(ii) provides that  “[a]n organization is not organized or operated exclusively for one or more of the purposes specified in subdivision (i) [i.e. charitable purposes] of this subparagraph unless it serves a public rather than a private interest.”  Further, as provided in the Internal Revenue Manual Section 7.25.3.16.7, an “organization must demonstrate that it is not organized or operated for the benefit of private interests such as designated individuals, the creator or his family, shareholders of the organizational or persons controlled directly or indirectly by such private interests.”  However, the IRS generally allows for an exception to the benefit of private individuals or organizations.  As provided in Internal Revenue Manual Section 7.25.3.16.7.1, “If an organization serves a public interest and also serves a private interest other than incidentally, it is not entitled to exemption under IRC 501(c)(3). 

However, to be incidental, the private benefit must be a necessary concomitant of the activity which benefits the public at large and accomplishes exempt purposes.  In other words, the benefit to the public cannot be achieved without necessarily benefitting certain private individuals.”  For example, if a public charity hosts certain events in furtherance of its purposes, such as a fundraising dinner, it is anticipated that the organization may need to engage the services of a for profit business or an individual to assist with putting on such an event.  It is further anticipated that this individual or organization will be compensated by the nonprofit for performing such services.  Therefore, even though an individual or company is receiving a benefit (i.e. compensation for the services performed), such benefit accompanies the larger focus of the actual charitable activities (i.e. the charity may be benefitting a certain cause, and by engaging an event planner the charity is able to put on a high profile event and raise funds to support its cause).  As such, it seems fairly certain that a 501(c)(3) organization that engages the services of a for profit event planning corporation is not at risk of violating the rules regulating private inurement.  Therefore, it appears that your charitable goals can be accomplished through the establishment of a nonprofit public benefit corporation exempt under Section 501(c)(3) of the Internal Revenue Code.

The final and arguably most important component of this structure relates to the relationship between the for profit company and the nonprofit organization in the event that there are common directors, officers, etc.  As far as the 1023 application, which is submitted to the IRS for 501(c)(3) approval, the arrangement between the two organizations must be disclosed, and any oral or written contracts must be described (and copies attached, in the case of a written agreement).  The IRS will also require disclosures regarding the precautions taken to ensure that the agreement was negotiated in good faith and at arm’s length (i.e. how it is ensured that both parties have equal bargaining power). 

In addition, under Section 4958 of the Internal Revenue Code, there are strict excise taxes imposed upon what are known as “excess benefit transactions.”  For purposes of these taxes, an excess benefit transaction is defined as “any transaction in which an economic benefit is provided by an applicable tax-exempt organization directly or indirectly to or for the use of any disqualified person if the value of the economic benefit provided exceeds the value of the consideration (including the performance of services) received for providing such benefit. For purposes of the preceding sentence, an economic benefit shall not be treated as consideration for the performance of services unless such organization clearly indicated its intent to so treat such benefit.”  Essentially, if a nonprofit were compensating a for profit, in which one of the nonprofit’s directors or officers had an interest, at a level above fair market value, the nonprofit and its directors may be taxed on such amount.

Note also, that in addition to the above, in the event the entities are formed in California, there are also some requirements under California regarding a nonprofit organization’s entering into contracts where one (or more) of its directors or officers has a material financial interest.  Specifically, under Section 5233 of the California Corporations Code, the following facts must be established:

(A)  The corporation entered into the transaction for its own benefit;

(B) The transaction was fair and reasonable as to the corporation at the time the corporation entered into the transaction;

(C) Prior to consummating the transaction or any part thereof the board authorized or approved the transaction in good faith by a vote of a majority of the directors then in office without counting the vote of the interested director or directors, and with knowledge of the material facts concerning the transaction and the director's interest in the transaction.  Except as provided in paragraph (3) of this subdivision, action by a committee of the board shall not satisfy this paragraph; and

(D) (i) Prior to authorizing or approving the transaction the board considered and in good faith determined after reasonable investigation under the circumstances that the corporation could not have obtained a more advantageous arrangement with reasonable effort under the circumstances or (ii) the corporation in fact could not have obtained a more advantageous arrangement with reasonable effort under the circumstances.

In addition, note that even if the entities are not formed in California, there may be laws similar to the above in other jurisdictions which govern relationships between entities such as those herein-described.

Based on the above discussion, it is possible that your goals may be accomplished by the formation of a hybrid structure based around a for profit entity and a nonprofit organization.  However, it is important to note that certain safeguards must be taken along the way to ensure that the agreements between the parties and the operations of the two organizations are carried out in a manner consistent with the laws of California as well as the IRS guidelines regulating 501(c)(3) public charities.