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.
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.
Generally, nonprofits are structured to qualify as Section 501(c)(3) organizations under the Internal Revenue Code. This can provide several advantages:
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.
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.
Get in touch today and find out how we can help you meet your objectives.