Should I Convert My Business into a Nonprofit?

By: Attorney Elena Fewell Howard

Sometimes clients come to us asking if they should convert their business into a nonprofit organization. They’ve heard it might be easier to get funding. In this blog, we’ll dive into some major items you should think about. The switch isn’t easy and shouldn’t be taken lightly as it can make running your entity more complicated. Here are some frequent issues that I discuss with potential clients who are thinking about becoming a nonprofit organization. 

#1: Ownership

Do you want to continue to own the entity?  If so, then a nonprofit will not be for you because no single person can own a nonprofit. You may know of some dysfunctional nonprofits where executives or officers have assigned themselves with all of the power behind the organization to an apathetic board. But this is not how a nonprofit is supposed to function by law. Those actors, whether intentional or not, are jeopardizing their status as a nonprofit because they are not following nonprofit law. If they are a nonprofit that has been granted federal exemption through an application to the IRS, they are also jeopardizing their exemption status if the IRS determines later they operate like a commercial venture and therefore are subject to taxation. 

A nonprofit organization will have a board of directors who govern the organization and work to ensure that the organization is engaging in activity in line with its mission and furthering their exempt purpose as set forth in the Internal Revenue Code. For example, if they are a 501c3 the exempt purposes could be charitable or educational or scientific.  It will have officers that manage the day-to-day operations who work at the behest of the board of directors and/or membership.

But don’t worry! There are viable alternatives to becoming a nonprofit if ownership is important to you. For instance, you can become a value-driven LLC or corporation with a social enterprise model. This does not give you exemption from taxation but it does make it clear that your organization is not just about seeking profit but also has a mission of bettering the world in some way. To learn more about making your business mission-driven, check out our blog post here. Additionally or alternatively, you could venture to find a fiscal sponsor to sponsor a particular set of programming that you have put together that is in line with their mission. 

#2: Treatment of Profit

Since a nonprofit must fulfill their mission of either being a 501c3 charitable or educational organization, 501c4 advocacy group or 501c7 benefit to their members, they need to have a financial system that supports that purpose. 

If you become a nonprofit, your main goal cannot be to make money for the sake of making money. A company may consider the switch so that they can obtain exemption from taxation or apply for grants; however, the company must determine whether they are ready to operate as a nonprofit and all that being a federally exempt nonprofit entails. Profits go to the nonprofit of which a significant portion should go to the defined exempt purpose of the organization. If an organization attempts to run a nonprofit like a for-profit enterprise, they will expose themselves to possible personal liability and risk their task exempt status. 

#3: Market Research

Do your research. If you are wanting to become a nonprofit charity, see if anyone else is doing what you are wanting to do and their proximity to you. In what way are you different from them? How are they funded? This is important because you will  want to see if you will be competing with other nonprofits for resources for your causes. Additionally, if there is already an organization, you may want to reach out to them to see if you can become a chapter of their organization or be affiliated with them so you can share in their resources. For this to occur, usually there will be reporting requirements to the main organization but they will be responsible for filing the federal paperwork. 

Whether or not you convert your for profit business to a nonprofit is something you will have to decide based on your specific circumstances. At Rational Unicorn, we can help with anything from business conversion to business formation to business scalability and everything in between. We offer no cost 30 minute consultations and paid hourly legal consultations. Please visit our contact page to book either type of appointment.