Legal Question in Business Law in California

Re: non-profit and business venture

(1) Whether a non-profit can use grant money to start a money-making business depends upon several factors including the terms of the grant and whether the specific money-making activity is authorized by the non-profit's foundational documents such as its Articles of Incorporation, bylaws and statements it may have made to the IRS to obtain and keep its tax exemption (if it has one).

(2) The main guiding principle in the sale of any money-making activity of a non-profit is that the non-profit's assets must always and forever be devoted strictly to non-profit goals and can never be converted into a for-profit use or for the benefit of particular persons (as opposed to a class of persons). I think there are examples of non-profit organizations spinning off businesses, e.g. a university selling a commercialization of something developed by faculty members in its laboratories, but any such deal would have to be planned and structured very carefully so that the non-profit obtained full value for the sell-off of its business. In other words, the non-profit cannot hand over a profitable activity to its staff, but perhaps the staff can buy it if they pay an adequate price.

Again, either (1) or (2) would require the non-profit to retain its own lawyer(s) and (2) would probably require independent accountant advice from a CPA specializing in advising non-profits in order to have the best chance of surviving IRS or state tax scrutiny or possibly donor lawsuits.