How to determine if your business can be a non-profit

Whoops. A business can’t actually be a nonprofit. But this is a question frequently posed by our clients, who are attracted to the perceived tax advantages of operating a nonprofit versus a for-profit entity.

It’s a common misconception that nonprofits and for-profit businesses are interchangeable, and that a group can simply anoint itself a “nonprofit.” Many nonprofits do look like businesses on the outside, but their internal operations are a sharp contrast to those of a for-profit corporation. Here, we aim to untangle this confusion and help you determine if your organization’s charitable purpose is such that you can organize as a nonprofit. When we discuss these issues with our clients, they frequently realize that their goals are entirely aligned with the purpose of a for-profit entity.

If you answered “true” to each of these questions, then your purpose falls squarely within the parameters of a nonprofit organization. Your next step should be to obtain the assistance of an attorney and accountant who can create a legally-sound organization that takes full advantage of the tax benefits made available to nonprofits.

If you answered “true” to most of the questions, we suggest that you revisit the questions to which you answered “false.” Would you be amenable to doing things differently, as needed to make that statement true?

If you answered “false” to most of the questions, your organization is likely incompatible with the concept of a nonprofit. This isn’t bad news, though! Seeking to form a for-profit entity that nets you or your business partners a financial benefit is an entrepreneurial and worthy venture. As a self-employed individual, there are still many tax benefits to which you can avail yourself, and you can also remain oriented towards an educational or charitable purpose.

Claiming to be a nonprofit if you're not one can have serious consequences..png

A few reminders:

  • Holding yourself out as a nonprofit without having legally-recognized nonprofit status is a big no-no. Organizations (even if they have no corporate form, like an LLC or corporation) cannot claim to be a nonprofit or have a nonprofit purpose unless they are registered in accordance with their state’s charitable organization laws.
  • Selling a “nonprofit” is legally impossible, so if you’ve managed to do it, you’ve done something wrong. This subjects you to potential penalties from the Attorney General or the IRS, and it could land you in very hot water, including criminal prosecution. To learn more about the process for reporting a so-called nonprofit’s misconduct, click through to those agencies’ websites.
  • You can operate a for-profit corporation that is oriented around doing good. If the nonprofit structure doesn’t quite fit your goals, that’s okay – this process should be about finding the corporate form that best suits the needs of your organization.

The nuances of corporate formations reinforce the importance of working with an experienced team. To unpack the benefits and disadvantages of the different corporate entities, reach out to us for a no-cost consultation. Remember that nothing in our blog ever constitutes legal advice and does not create an attorney-client relationship. It's just here for informational purposes.

© 2017 Jackson LLP

 

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