Legal Question in Business Law in California

Yes, provided they are careful about how they do it, how they keep the books, and how they pay the taxes on the for profit business. The question, however, is why would they want to, unless the non-profit would only be a partial owner. If the non-profit operates a business that turns a profit, but all the profits go to the non-profit, then the business will never have a taxable profit, which could make it a "hobby." Then the non-profit would have to pay taxes on the business, when if it was just a fund-raising operation of the non-profit, there would be no tax issues. The only situation in which I can think of any sensible reason for a non-profit to own a for-profit business, would be if there were other owners of the business who wanted to make a profit, and the non-profit determined buying into the for-profit business would be a prudent way to raise funds for the non-profit, in spite of the tax disadvantages. Of course that does happen all the time when non-profits invest excess cash in publicly traded equities, but it rarely makes sense on a small scale.

It is not unusual for a nonprofit to carry on an unrelated business that could threaten its tax exempt status. One option would be for the nonprofit to spin-off the unrelated business into another wholly-owned entity, which entity will pay income tax on the net income from its unrelated business and distribute the profits to the nonprofit on a tax-free basis.