Legal Question in Business Law in California

Re: Profit-Non Profit

Well, non-profit corporations can and do purchase goods and services from for-profit corporations; and a for-profit corporation could be a member of a non-profit.

However, that's about where the good news ends. A for-profit corporation cannot affiliate with a non-profit in such a way as to provide a conduit for extracting profits out of the non-profit.

There is, for example, a prohibition agaist a non-profit making distributions (Corporations Code section 5410). Money leaking out of the non-profit and into the coffers of the for-profit would likely be treated as an unlawful distribution to the extent the deal under which the money was transferred represented favoritism and/or the non-profit didn't get full value for its money.

Also, there is a prohibition against the directors or trustees of a non-profit engaging in self-dealing transactions. See Corporations Code section 5233. The provisions of this section are interpreted and applied broadly, and

it is a sticky trap for schemes to divert money out of non-profits. See also section 5234 re interlocking boards of directors.