What must a for-profit subsidiary of an exempt organization do to maintain compliance?

• A. Operate under the same board as the parent organization
• B. Conduct similar activities as the parent organization
• C. Maintain separate activities and records
• D. Provide a guaranteed profit margin to the parent

Answer: (C)

To maintain compliance, a for-profit subsidiary of an exempt organization must maintain separate activities and records. This separation is crucial because it helps ensure that the for-profit entity operates independently and does not intertwine its financial activities with those of the nonprofit parent organization. Such separation is essential for regulatory purposes and helps to uphold the nonprofit status of the exempt organization, preventing issues related to unrelated business income tax, which can arise if the operations of the for-profit are too closely aligned or entangled with those of the exempt organization.

By keeping distinct operations and records, the for-profit subsidiary can clearly delineate its activities, ensuring transparency and accountability. This practice also aids in protecting the exempt organization's tax-exempt status by ensuring that the for-profit entity's operations do not jeopardize the nonprofit's compliance with IRS regulations.