Nonprofit or Not


How to decide if your business should become a nonprofit

If you are in the process of starting or are currently running a small business, you may be wondering whether or not to apply to become a nonprofit. Nonprofit status provides manifold advantages for saving and raising money, but at the cost of fees and limitations. Some businesses, even those with the sole aim of aiding a cause, may benefit more by remaining for-profit. Examining the benefits provided to nonprofits can help you determine if they support your business’s goals and outweigh the advantages of remaining for-profit.

How to decide if your business should become a nonprofitNonprofit organizations are a type of corporation that is afforded benefits by the government to help them achieve their mission of supporting a specific cause. Most of these benefits result from various tax exemptions, such as exemption from federal and state corporate income tax. This exemption is provided to allow the organization to devote maximum revenue toward fulfilling its mission. Nonprofits in some states may also be exempt from sales tax if they have 501(c)(3) status.

Nonprofits are able to raise funds from the public and are given several other advantages that help with fundraising. The fact that donations to a nonprofit are tax deductible can be a deciding factor for on-the-fence potential donors.

“Individual donors to your nonprofit corporation can claim personal federal income tax deductions for their donations, and bequests will be exempt from federal estate taxes,” said Joanne Fritz, veteran nonprofit board member and contributor to the website About.com.

Furthermore, the corporation status of nonprofits means they are legal entities in their own right, existing aside from and beyond the involvement of founders and managers. This fact is attractive to potential donors who want donations to go toward a long-lasting cause that will not cease to exist if a manager quits. It also ensures that members’ assets are protected separately from those of the organization.

“This means that if a creditor sues the nonprofit because of an outstanding debt, the personal assets of those involved in the nonprofit are protected,” said Rose Johnson of the Houston Chronicle.

Like other corporations, nonprofits must set up a board of directors that provides the leadership responsible for forming the organization’s rules and the management strategies to help it meet its goals. This board of directors typically comprises three members: a president, a secretary and a treasurer.

Nonprofits can also raise money through government grants.

“Tax-exempt government foundations such as the National Endowment for the Arts or [the National Endowment for the] Humanities and private foundations such as the United Way or the Ford Foundation are required to give funds only to 501(c)(3) organizations,” said Fritz.

BusinessPlan-webWith these many advantages comes the responsibility to adhere to the codes set by the IRS for 501(c)(3) status organizations or risk losing nonprofit status. One of the requirements is filing a Form 990 with annual tax returns. The IRS plays a large role in the oversight of nonprofit organizations.

“The IRS determines how a company can use its profits. Nonprofit organizations cannot distribute profits to members of the organization,” said Johnson in the Houston Chronicle.

Filing as a nonprofit is not free, and many small organizations lack the experience necessary to complete the process without the help and expense of a lawyer.

“The fees to apply for 501(c)(3) status are quite expensive, especially for organizations with small budgets. The fee structure is based upon your expected annual revenue,” said Johnson. These extra costs should be taken into consideration by small businesses that may find more success in waiting until they are better established before applying.

Staying for-profit allows you to retain control of your business, shifting its mission as your own goals change. If it is not mandated that all profits go toward the business’s mission, they can go toward expanding and diversifying to meet additional needs of the community or even toward opening a new business.

The ability to benefit personally from profits is another large advantage with many implications. If your business is for-profit, you have the ability to save up for a house or pay directors and hire enough employees to allow free time for other pursuits.

A further advantage of remaining for-profit is the ability to distribute assets to owners and shareholders in the event that the business ends, whereas nonprofits must distribute the remaining assets to other nonprofits when they go out of business.

 

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