Thinking of starting a nonprofit? There are other business structures for community based organizations

Asking yourself: nonprofit vs. for profit? Have you been wondering if starting a nonprofit is the best way to form an organization for your community? While nonprofits are often seen as the way to have the greatest impact, often times starting a nonprofit is not the only option. It will depend on what your goals are, who you are doing business with, what product or service you offer, and where things are at (finances, time, resources). Nonprofits take more people to run and require more backend work.

The important thing to remember here is that nonprofits are not the only organizational structure available to help you create a community minded enterprise. In this blog, we will highlight some of the various business structures for you to consider.   We hope it will help you decide what works best for your plans and dreams.

1. For Profit Social Enterprise/Community Based Business

You could form a for profit business that chooses to partner with existing nonprofit and community organizations. For example, a for profit that decides to donate a percentage of profit or develops internal give back programs.  Having a regular program to give back in various ways is often important to business owners.  Talk to your tax professional, but it’s very likely those donations will be tax deductible for your business.

2. For Profit Certified Benefit Company

What is a benefit corporation?  Have you heard of this certification? This is a specific type of for-profit social enterprise that chooses to become a certified benefit company. 
A benefit company commits to following the “Triple P Model: Profit, Planet, and People.” They set goals to follow third party standards and get certified. Certification is good for marketing but also internal and external year-to-year accountability assessment. 

B Corp is one well-known type, but that is a rather expensive certification process. We recommend Benefit Corporations for Good, who has certified lots of small businesses including ours.  Check out their website to decide if you should become a benefit company.

3. Cooperative

People in a business organization who share a common social, cultural, or economic purpose. Cooperatives are democratically owned and controlled by their members/owners. Many entity types can take on a “co-op” model. Some states like Oregon offer cooperative as an entity choice that can be selected when filing. Cooperatives work together to achieve sustainable development of the community it has formed to help (the member owners) and often to improve the community around it. 

4. Program or Business with a Nonprofit Fiscal Sponsor

Maybe you are considering a nonprofit but are not ready yet.  Perhaps you want to work with a fiscal sponsor. A fiscal sponsor is a pre-existing nonprofit that has 501(c)(3) status. Some fiscal sponsors facilitate public purpose funds to this group all the way to sharing resources and staff and everything in between.   This program may be funded through the fiscal sponsor for a period of time, and then renewed or discontinued.  Sometimes a program decides to become a free standing nonprofit organization on their own.  

So, let’s talk about that.

5. New Nonprofit Formation - Free Standing

This is the option you came here to read about!  Are you ready to become a nonprofit organization?
What is involved in filing a nonprofit?

Nonprofit formation requires being ready to not only run an organization like a business but to form a board with a minimum of three people, complete various types of lengthy detailed paperwork, and remain compliant with not just the Secretary of State and State Department of Justice, but the IRS Nonprofit Compliance Rules. 

There are annual filing requirements for nonprofit organizations even if you obtain tax-exempt status.

If you are ready to embark upon all of the steps of nonprofit formation, a group would form a domestic nonprofit organization at the state level. Then when ready (recommended within 27 months or less), file for federal tax exemption (ie. 501(c)(3), (4), (6), etc). I bet you’ve heard of the 501c3 designation, but the IRS tax code has twenty-nine different categories.  The tax exempt paperwork may include a Form 1023.  As part of this paperwork, you will need to come up with financial projections for at least three years.  Does this sound like a lot of work? It is!

Sometimes nonprofit groups who expect to be very small and remain very small will take the route of a 1023-EZ.  All the requirements are still the same.  The initial paperwork is shorter, but has a higher rate of requests for more information from the IRS.

6. New Nonprofit Sister Organization to an Existing For Profit Business

Can a for-profit own a non-profit? Yes, kind of.
Here’s a well known example of this: Microsoft (for profit) and the Bill and Melinda Gates Foundation (nonprofit). An existing for profit business can form a nonprofit organization for research, education, giving out scholarships, and so on. The reality is this requires the staff and resources (and patience) to manage two companies with two sets of compliance rules, two boards, and two sets of books.  It is double the work.  You need double the people, and to keep it all separate.  

Now you’ve read some other options to consider.  It’s worth taking some time to ponder if you have the people and resources to pull together a nonprofit organization, or if it would be wise to choose another option.  

Need help forming a 501c3? Rational Unicorn Legal Services can help with your nonprofit formation documents.  If you are choosing a different path, we can also assist you with that. We form entities of all types, from LLCs and DBAs to corporations, both nonprofit and for profit.  We serve Washington, Oregon, and California primarily, but nonprofit formation is federal. We can provide a quote.

Get started with us by visiting our contact page.