How to Form a 501(c)(2) Title-Holding Corporation
Understand the function of a 501(c)(2) as a property-holding corporation for a parent nonprofit, including its distinct legal structure and compliance path.
A 501(c)(2) organization is a nonprofit entity structured as a title-holding corporation for the exclusive benefit of a single tax-exempt parent organization. The sole function of a 501(c)(2) is to hold legal title to property, collect income from it, and transfer the entire net amount to its parent. This structure allows the parent organization to protect its assets, limit liability, and simplify property management without jeopardizing its own tax-exempt status.
Organizational and Operational Requirements
To qualify for tax-exempt status under Internal Revenue Code (IRC) Section 501(c)(2), an entity must be organized as a corporation. The formation documents, such as the articles of incorporation, must clearly define the corporation’s limited scope and purpose from its inception.
The organizing documents must restrict the corporation’s activities to holding title to property, collecting income, and remitting the net income to a single exempt parent organization. This language must be narrowly defined, as any ambiguity in the corporate charter can lead to denial of the application. The documents must also demonstrate that the parent organization maintains effective control over the title-holding corporation.
The parent organization must be an entity exempt from tax under IRC Section 501(a). The title-holding corporation is required to turn over its entire income, less allowable expenses, to this parent. Acceptable expenses are those directly related to property management, such as taxes, insurance, and routine repairs.
The corporation is prohibited from engaging in any active trade or business beyond its passive property management role. For instance, it can own and rent out an office building to collect rental income. It cannot, however, operate a business, such as a consulting firm or retail store, from within that building.
Preparing the Application for Exemption
The request for tax-exempt status for a title-holding corporation is made by filing Form 1024, Application for Recognition of Exemption Under Section 501(a). This application is used for organizations seeking exemption under various 501(c) sections, including 501(c)(2).
A key part of the application package is the organizing documents. Applicants must provide a conformed copy of the Articles of Incorporation and any amendments. The articles must contain clauses that state the exclusive title-holding purpose and name the single exempt parent organization. If the corporation has adopted bylaws, a copy must also be included.
Form 1024 requires detailed information about the applicant and its parent. This includes the corporation’s name, address, and Employer Identification Number (EIN), along with the same information for its exempt parent. The application also requires a description of the property the corporation will hold and a financial projection.
Submitting the Application to the IRS
Once Form 1024 is complete, the application and all supporting documents must be submitted to the IRS. The IRS mandates that Form 1024 be filed electronically through the Pay.gov portal, as paper submissions are no longer accepted.
The submission process involves uploading a single PDF file containing all required attachments, such as the articles of incorporation and bylaws. At the time of submission, the applicant must also pay the required user fee through Pay.gov. This fee amount is updated annually by the IRS.
After submission, the IRS begins its review. The timeline for receiving a determination letter, which officially recognizes the organization’s tax-exempt status, can take several months. The IRS may contact the applicant during this period to request additional information.
Annual Reporting Requirements
After receiving a determination letter from the IRS, a 501(c)(2) corporation must fulfill annual reporting obligations to maintain its tax-exempt status. The requirement is the yearly filing of an information return from the Form 990 series. This return provides the IRS with information about the organization’s finances and activities for the year.
The specific form an organization must file depends on its financial activity. Corporations with gross receipts of $50,000 or less file Form 990-N. Those with gross receipts under $200,000 and total assets under $500,000 file Form 990-EZ. Organizations exceeding these thresholds must file the full Form 990.
The deadline for filing the annual return is the 15th day of the 5th month following the end of the organization’s accounting period. For an organization using a calendar year, the deadline is May 15th. Failure to file this return for three consecutive years results in the automatic revocation of the organization’s tax-exempt status.