Nonprofits sometimes create for-profit subsidiaries for three reasons. The for-profit can provide an arms-length protection for liability purposes (in case something goes badly, it won't affect the assets of the nonprofit parent). The for-profit can often gain access to financing unavailable to nonprofits. And, the for-profit can provide a structure to support employees and conduct service in a way that is different than the way the nonprofit and its employees are supported and does business.
So what can a nonprofit subsidiary do for a for-profit? Apparently, according to a story in the Wall Street Journal, the nonprofit can get access to funds the for-profit can't get access to, at least not directly. According to the Journal, one New Jersey nonprofit has more than half of all the halfway house revenue.
The nonprofit Education and Health Centers of America gets about half of the state's business. But the organization is essentially a shell company for the for-profit Community Education Centers, the comptroller's office said. Bill Palatucci, Christie's top political adviser and longtime friend, is a senior vice president at CEC and until last year was listed as the nonprofit's director of development on its tax forms.
Since 1997, the state has paid the nonprofit EHCA more than $400 million, about $390 million of which was then paid to the for-profit company for operations.
The companies have the same CEO, and the nonprofit funnels nearly all the fees it gets from the state to the for-profit company. The CEO said the nonprofit is a "holding company" and "wouldn't exist" without the for-profit company. The CEO said he worked with the state Attorney General to make sure the arrangement was legal, providing two letters from 1994 and 1996 approving the contract.
So good situation or bad? If the "game" says that a business which can get a job done must also have a nonprofit status, then why not this arrangement? Is there any harm done? Is the nonprofit not pursuing a charitable purpose? And are the outcomes what is expected by the state? Perhaps our zealous reporter, whom I thank for bringing the issue to light, would do better to focus on outcomes rather than structure.
While it's true that the nonprofit sector is intended to fill the void between the for-profit and public sectors, perhaps there are occasions where the structure is not what makes the difference.