Got a “Business” Idea? You Might Want to Form a Nonprofit

Do you have an idea for a new venture with social benefits or environmental applications? You can set up as a for-profit entity — such as a C corporation, S corporation or limited liability company — with charitable functions. Or, if your key objectives are more altruistic, you may want to consider an alternative: forming a not-for-profit organization.

nonprofit employee documenting new food donations

Usually, nonprofits are intended to provide significant benefits to the public, instead of profits to individual owners. There are many potential advantages to forming a nonprofit vs. a business, including exemption from federal income tax if your organization meets certain IRS requirements. But there are also risks involved and hurdles that must be cleared when running a charitable organization. Here are the main pros and cons of setting up your "company" as a charity.

Tax, Financial and Legal Benefits

Generally, nonprofits are structured to qualify as Section 501(c)(3) organizations under the Internal Revenue Code. This can provide several advantages:

Potential Challenges

There are also drawbacks to forming a nonprofit. Before you make the decision, consider such issues as fees and expenses. For example, you'll be required to file — and pay fees to file — documents with your state. In most states, you'll also have to pay an annual fee and incur costs to engage a registered agent to receive government and certain legal paperwork on behalf of your organization.

Also know that operating a nonprofit doesn't exempt your organization from certain business obligations. Nonprofits must:

Other rules and requirements may apply. In general, tax law dictates what not-for-profit organizations can and can't do. For instance, 501(c)(3) organizations generally aren't allowed to engage in political or lobbying activities. If they break these rules, they can lose their tax-exempt status and all of the benefits that go along with it.

Talk It Over

Your financial advisor can help you weigh the merits of forming a not-for-profit vs. a for-profit business. You might also want to discuss whether a B corporation — a hybrid nonprofit/for-profit business entity — might make sense. Your philanthropic intentions and financial objectives certainly will affect the decision. But don't forget to consider all the details that potentially go into running a successful nonprofit.

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