What is a Non-Profit?
Non-profits refer to organizations like public charities, foundations, churches, fraternal groups, and chambers of commerce, which are built to address a social purpose. They encompass a broad range of structures such as non-governmental organizations, referred to as NGOs. NGOs tend to tackle larger causes serving the public good and can be on an international scale. In the U.S. more than 1.5 million nonprofits exist, according to the National Center for Charitable Statistics (NCCS).
The Benefits of Non-Profit Status?
Non-profits can qualify under the 501(c) federal corporate income tax exemption. After establishing this exemption, most nonprofits are exempt under state and local tax law. This status also increases the chance of donations to a nonprofit, as individuals are more willing to donate to organizations that will help reduce their tax liability. One can claim a deduction on their taxes regarding a gift or donation to a 501(c) qualified organization. Non-profits may also solicit money from both private and public grants. When incorporating a non-profit, the individual founders are completely separated from the nonprofit. This takes the burden off any individual founders in the case of debts, lawsuits, fines, and other legal matters.
Simplified Legal Structure
The non-profit organization holds a legal status and identity that transcends the founders. This aspect is attractive to those looking to start a mission-driven organization that will endure for generations. Donors are more willing to give to organizations with legacies that they foresee surviving in the long term. In today's modern society, many causes are funded through thrown together "go fund me" pages. Some of these efforts can raise significant funds. Such informal fund raising efforts provide no legal protection to the donor that the funds donated will actually go towards the stated cause.
Starting a Non-Profit
The elimination of tax and legal liabilities may sound like an excellent way to mitigate risk when starting a new organization. However, when businesses try to take off the ground, they need to raise capital from investors and attract talent with competitive wages. The public's reluctance to give non-profits the same leeway as for-profits severely thwart their ability to raise money. This challenge to raise large sums of money from investors is the reason many non-profits are created by well-established families and foundations to achieve their personal goals for which a return on investment is not needed.
Controlling a Nonprofit
The diminished role of founders and individuals of non-profits is a major difference in a non-profit versus a for-profit company. For leaders who desire a large degree of control over the direction of the non-profit, they may not enjoy the shared control structure, which delegates decisions to several directors and follows relatively stringent procedures. Most non-profits also have a board of directors which guides the executive team and gives the direction for the company.
Hybrid Business Models
Non-profits receive better treatment by the federal government and charitable view from the general public. Holding for-profit status gives business leaders autonomy and empowers companies with an entrepreneurial spirit. Therefore, some organizations have taken a hybrid approach by maintaining a for-profit leg and incorporating a nonprofit into the business, or vice versa. Many traditional for-profit companies and entire industries have taken on corporate social responsibility standards and initiatives. These companies work to optimize social good works and profits side by side.
The Bottom Line
When starting a business that has a recognized benefit to society, the option to incorporate as a non-profit becomes available to an aspiring business owner. While organizing as a non-profit and receiving a 501(c)(3) exemption may make fund raising easier, you are making a decision to forego any of the equity benefits of owning a business which exists in the for-profit world. A non-profit is not "owned" by any one individual and is run by the executives and the board of directors. Depending on your individual goals, this may be an opportunity to get more people involved in your business which you desire or it may created unnecessary complexities and inefficiencies by having to deal with so many personalities. Either structure can provide the entrepreneur a very good income. Which is the best decision for you? Well, it depends.
"Do It For Yourself" Podcast
On our most recent podcast, we speak with our guest Knyvett Lee who takes us through the process of switching over from a for-profit business to a non-profit business. She walks us through why her initial decision to create a for-profit business ended up not being the best decision for her. We touch upon how Knyvett applied her entrepreneurial skills during the transition. You could also learn more about Knyvett and her business Monarch Care by visiting her LinkedIn.