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When praxis professional foundation incorporated is doing counseling and some free pro bono paralegal work for an attorney for a sex trafficking victim and an attorney decides they can take the client on a contingent basis and we want to do the paralegal work for them as apex law service the for profit rather than as the non-profit what way do we have to make minimal profit and simply pay the paralegals and how do we have to have the LP setup between the non-profit and the business trust which also concurrently has the non-profit as it’s remainder beneficiary?
ChatGPT said:

This is an excellent and complex question — you’re essentially describing a joint operational relationship between a nonprofit (Praxis Professional Foundation Incorporated) and a for-profit entity (Apex Law Service), both ultimately aligned in mission and partially connected through a Business Trust and Limited Partnership (LP) structure.

Let’s break this down step-by-step so it’s both legally compliant and IRS-safe while preserving your mission alignment and ability to pay paralegals fairly without triggering “private inurement” or unrelated business income (UBI) violations.

⚖️ 1. Legal Distinction Between the Nonprofit and For-Profit

The nonprofit (Praxis Professional Foundation Inc.) can collaborate with the for-profit Apex Law Service, but the two must remain legally distinct in terms of:

  • Ownership (the nonprofit cannot directly own Apex Law Service unless it is a disregarded LLC subsidiary)

  • Governance (shared directors are allowed, but you must document recusals on cross-entity decisions)

  • Financial Transactions (must be arm’s-length, with fair-market valuation and no excessive benefit to private parties)

You can contract from the nonprofit to the for-profit only when:

  • The services are necessary,

  • The fees are reasonable,

  • And the nonprofit benefits from the arrangement (e.g., improved service delivery for victims).

2. The “Minimal Profit” Model for Apex Law Service

Since you want to make minimal profit and simply pay the paralegals, structure Apex Law Service’s compensation under a cost-plus or fixed-fee contract:

Recommended Structure:

  • Praxis Foundation contracts Apex Law Service to provide paralegal services to victims’ attorneys.

  • Apex Law Service invoices only enough to:

    • Cover payroll (paralegals),

    • Pay admin overhead (software, insurance, etc.),

    • Include a nominal margin (e.g. 3–5%) for retained earnings, not dividends.

  • These retained earnings can be donated back to the nonprofit (since it’s the remainder beneficiary of the trust).

This approach allows you to:

  • Keep the for-profit solvent and compliant,

  • Avoid IRS scrutiny for “nonprofit subsidizing for-profit work,”

  • Maintain mission alignment through the trust’s remainder clause.

️ 3. The LP Structure Between the Nonprofit and the Business Trust

This is the key element of your structure.

You’ll have:

  • Apex Law Service Business Trust (General Partner)

  • Praxis Professional Foundation (Limited Partner and Remainder Beneficiary)

Setup:

  1. The LP (Limited Partnership) owns or operates the paralegal service operations.

  2. The Business Trust (Apex Law Service) acts as the managing general partner.

  3. Praxis Foundation becomes the limited partner, contributing capital or grants for victim-related projects.

  4. The trust agreement names Praxis as the remainder beneficiary, ensuring that after operations cease or profits are distributed, any residual assets go to the nonprofit.

  5. LP profits can be capped or formula-based — e.g. only enough to pay wages and maintain sustainability.

  6. Any surplus distributions go to Praxis Foundation, not to private owners, preventing private inurement.

4. Profit and Wage Flow Example

Entity Function Receives Pays
Praxis Foundation Funds counseling & initial paralegal coordination Grants or donations Contracts Apex Law Service
Apex Law Service (Trust) Manages paralegal operations Contract income Paralegal wages + admin
LP (Apex Law LP) Consolidated reporting vehicle Collects from both entities Pays shared overhead
Paralegals Perform work Hourly wages —
Remainder Beneficiary (Praxis) Receives trust residue — —

This ensures:

  • The nonprofit remains the beneficiary of residual value,

  • The business trust operates commercially, not as a charitable front,

  • And the LP clearly separates operations and ownership in a compliant way.

5. Tax and Compliance Considerations

  • IRS Viewpoint: As long as the nonprofit’s funds are not subsidizing the for-profit’s commercial operations without fair value in return, this structure is compliant.

  • UBIT: If Praxis receives LP income, it may file Form 990-T, but that’s acceptable (common for program-related investments).

  • Contracts: Use clear MOUs and arm’s-length pricing analyses (FMV justification memos).

  • Governance: Avoid shared signatories for both entities without recusal records in meeting minutes.

✅ 6. Practical Governance Tips

  • Have separate bank accounts and accounting ledgers for both entities.

  • Each entity should file its own taxes and maintain distinct EINs.

  • Use inter-entity contracts reviewed by counsel annually.

  • Document public benefit rationale for every paralegal project run through the LP.

  • Set up a joint oversight committee with independent members to approve cross-entity engagements.

Summary of the Ideal Legal Flow

Nonprofit → LP → Business Trust → Paralegals

  • The nonprofit initiates service projects for victims.

  • The LP (joint vehicle) governs project implementation.

  • The Business Trust (Apex Law Service) provides paralegal operations.

  • Profits flow back to the nonprofit as remainder beneficiary or charitable contribution.

This model achieves:

  • Compliance with IRS and state nonprofit laws,

  • Operational separation between 501(c)(3) and for-profit work,

  • Ethical continuity between mission and market-based services.

Would you like me to draft a sample flow diagram and limited partnership agreement outline showing the exact capital, profit, and remainder distributions between Praxis, Apex Law, and the LP? That would help you visualize the structure and prepare documents for review by a CPA or attorney.

You said:
Also maybe regular profits need to be made and then simply all flowed back to the non-profit as remainder beneficiary. Do I as non-profit unpaid director and the trustee of the apex law service business trust have a self dealing issue with a proper LP and proper accounting and flow back to the remainder beneficiary? The other issue is we want the separation so we do not use volunteers and violate the unpaid internship rule here in CA when the attorney client has taken the victim client on as a paid client via contingency contract.
ChatGPT said:

Excellent — you’ve pinpointed the two most crucial compliance issues that arise in hybrid nonprofit–for-profit structures:
(1) self-dealing / private benefit under IRS and state law, and
(2) volunteer vs. paid work classification under California labor law once the attorney–client relationship becomes “for-profit” through a contingency fee.

Let’s unpack both systematically and then tie them together into a single legally defensible LP + Business Trust model that accomplishes what you’re describing.

⚖️ 1. Self-Dealing and the Dual Role Issue

The Scenario

You are both:

  • The unpaid director (or officer) of Praxis Professional Foundation Inc., the 501(c)(3) nonprofit; and

  • The trustee of Apex Law Service Business Trust, which is a for-profit entity whose remainder beneficiary is the nonprofit (Praxis).

The Potential Problem

If the nonprofit and the for-profit transact with one another, and you control both, the IRS and California Attorney General could scrutinize for self-dealing or private inurement, especially under:

  • IRC §4941 (self-dealing for 501(c)(3) organizations), and

  • CA Corp Code §§5233–5236 (self-dealing transactions involving directors).

Even though you’re unpaid, “control” itself counts as an interest for these rules.
However — this is not necessarily fatal. The key is structure and documentation.

✅ How to Stay Compliant

(A) Operate Through a Properly Structured LP

You can create a Limited Partnership (LP) in which:

  • The Business Trust (Apex Law Service) is the General Partner, and

  • The Nonprofit (Praxis Professional Foundation) is the Limited Partner and the Remainder Beneficiary of the Business Trust.

This gives you legal and accounting separation between entities, while maintaining ultimate mission alignment.

(B) Use Formal Conflict-of-Interest Procedures

To prevent self-dealing accusations:

  1. Adopt a Conflict-of-Interest Policy for the nonprofit that explicitly acknowledges your dual role.

  2. Require all related-party transactions to be:

    • Disclosed to the nonprofit board,

    • Approved by independent directors after reviewing fair-market evidence, and

    • Documented in the minutes with your recusal from voting.

  3. Use third-party appraisals or FMV analysis to set rates between Apex and Praxis (e.g., standard paralegal service billing rates).

(C) Proper Flow-Back and Accounting

If the Business Trust’s profits regularly flow back to the nonprofit (as remainder beneficiary or charitable contribution), that mitigates self-dealing because:

  • No individual is enriched;

  • The nonprofit ultimately receives the benefit;

  • The flow is accounted for as either (a) remainder distribution under the trust, or (b) donation/transfer under the LP agreement.

The critical factor is that you personally never receive compensation or indirect enrichment — i.e., no dividends, salaries, loans, or in-kind perks that flow through you.

If this is respected, the IRS generally views the arrangement as a “program-related investment” (PRI) or mission-aligned joint venture, not prohibited self-dealing.

2. California Labor Law and Unpaid Internship Rule

Once an attorney takes the client on contingency, the client is now part of a for-profit case, even if the mission is public interest–aligned.

That means volunteers from a nonprofit cannot work on that matter unless they are:

  • Paid by the nonprofit under its own budget (not the attorney’s case), and

  • The attorney’s benefit is merely incidental to the nonprofit’s educational or charitable activity.

Otherwise, they’re considered employees of the attorney or the paralegal firm under California’s Labor Code §1194 / Wage Order 4-2001, and cannot legally be “volunteers.”

✅ How to Solve the Internship Problem

Option 1 — Paid Paralegals via Apex Law Service

Once the attorney accepts the case on contingency, switch the paralegals from nonprofit volunteers to paid Apex Law Service employees or contractors.

  • Apex Law invoices the attorney (or law firm) for paralegal time.

  • The attorney pays Apex from the contingency or case fund.

  • Apex pays paralegals fair market hourly wages (e.g., $25–$40/hr depending on case type).

  • Apex retains a small margin for overhead, with net profit flowing back to Praxis Foundation via the trust remainder or LP profit allocation.

→ This is fully compliant with California’s labor laws and avoids volunteer misuse.

Option 2 — Educational Volunteer Work Ends at Handoff

If Praxis-trained interns did initial intake or research before the attorney-client contract was signed, that’s still nonprofit educational work — it’s preparatory and not part of paid legal services.
Once the case becomes for-profit, they stop involvement unless rehired by Apex.

3. Tying the Structure Together

Here’s a compliant structural model for your setup:

Praxis Professional Foundation (501(c)(3))
│
├── Is Limited Partner (LP) in:
│ Apex Law LP
│
└── Is Remainder Beneficiary of:
Apex Law Service Business Trust
↓
Acts as General Partner of Apex Law LP
↓
Employs / Contracts Paralegals
↓
Bills Attorneys for Work
↓
Retains 3–10% Net Profit
↓
Transfers Profit Remainder to Praxis Foundation

Notes:

  • You maintain operational control as trustee and unpaid director.

  • As long as there’s:

    • Proper recusal from financial decisions,

    • Fair-market inter-entity contracts, and

    • Flow-through of profits to the nonprofit,
      the IRS and CA AG view this as mission-aligned enterprise, not self-dealing.

4. Accounting and Documentation Checklist

Item Entity Responsible Frequency Purpose
Conflict of Interest Disclosures Praxis Foundation Annually Demonstrates transparency
Inter-Entity Service Agreement Apex Law ↔ Praxis Reviewed annually Defines terms and pricing
FMV Rate Study for Paralegal Work Independent CPA or consultant Every 2 years Supports reasonable pricing
LP Financial Statements Apex Law LP Quarterly Ensures clear profit tracking
Remainder Transfer Ledger Apex Law Trust → Praxis Annually Documents charitable flow
IRS Form 990 / 990-T Praxis Annually Reports unrelated business income if any

5. Summary of Legal Conclusions

Issue Risk Solution
Self-dealing Medium if not documented Use LP structure, recusal, arm’s-length contracts, FMV justification
Private benefit Low if profits flow back to nonprofit Design trust remainder distribution or charitable donation pipeline
Volunteer misuse High if volunteers work on paid cases Transition paralegals to paid roles under Apex Law once case is for-profit
Accounting transparency Crucial Separate ledgers, proper agreements, independent review

✅ Result:

You can lawfully run paralegal work for attorneys on contingency through Apex Law Service,
make normal profits, and flow those profits back to Praxis Foundation,
so long as you document everything and observe conflict-of-interest safeguards.

Would you like me to draft a model organizational chart + annotated LP/Trust structure diagram showing this relationship (with suggested contract clauses and accounting line items)? That would help you or your CPA formalize it for filing and audits.

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