Being a nonprofit organization doesn’t necessarily mean that you can’t make a profit. It simply means that your primary focus is providing programs and services that help to provide for the general good of a community. Hospitals, food programs, and international outreach missions are common examples of companies that have nonprofit status. In the United States, a church is even instantly recognized as being a nonprofit.
If you’re thinking about starting your own business or you’re wanting to convert your business to a different status, then here are the key points to consider when looking at the pros and cons of nonprofit status.
Here Are the 6 Pros of Nonprofit Status
1. You’re not going to have any tax liabilities.
If your organization is awarded with a nonprofit status, then your company will be exempted from paying taxes. In most instances, this applies at all levels of government, including the local level. Some companies may be required to apply to each level of government, however, for this status to be officially recognized. This allows the profits that do come in to be funneled back into the community that is being served.
2. Donations to may nonprofit status organizations are tax-deductible.
If your organization’s nonprofit status is listed as a 501c3 in the United States, then any donations that people make to the company will be classified as tax deductible by the federal government. This incentive has been put into place as an incentive to reduce tax liabilities for households while still being able to do something good with their extra cash.
3. It makes an organization eligible to receive public and private grants.
A company that has nonprofit status is allowed to solicit for charitable donations from a wide variety of demographics. Grants are part of this process. Many government agencies and public/private foundations often restrict the grants that they’ll give out every year to organizations with a nonprofit status.
4. There’s a limited amount of personal liability that exists within the nonprofit structure.
Should there be a legal dispute with a nonprofit organization, the employees of that nonprofit are not generally at risk of having their personal assets put at risk. Although the nonprofit cannot become a shield for illegal activities, personal liabilities for debt that occurs is generally assigned to the business instead of the individual like a sole proprietor structure would.
5. Nonprofits are often given discounts on marketing products.
Many companies will provide nonprofit organizations with discounted rates for marketing. Sometimes these products are even offered for free. This gives the organization a chance to directly compete with for-profit companies on TV, radio, and other mediums so that a greater awareness of their mission can be generated within the general public. Even the federal government in the United States offers discounted postage rates.
6. There is still the possibility to lobby politicians for results.
Although nonprofits are not generally allowed to endorse political candidates, they are allowed to spend a certain amount of their revenues on lobbying. Up to 20% of their budget, in fact, can be used to lobby for subject specific needs in the government without risking the nonprofit status.
7. There’s always the chance to do something good.
Nonprofits are in the business of helping others in some way. It might not be as profitable as other business opportunities, but it can be much more rewarding.
Here Are the 7 Cons of Nonprofit Status
1. You must be incorporated as an organization to qualify for this status.
A partnership or a sole proprietor cannot have their business be classified as a nonprofit organization. It is only available to businesses that are incorporated as an organization. This means there is a lot of administrative work that must be completed before the nonprofit status can even be requested. The only exception to this rule in the United States is that an LLC that is entirely made up of nonprofits can request nonprofit status.
2. This status is not a forever guarantee.
It is possible, although rare, for an organization to be stripped of its nonprofit status. If the articles of incorporation are not being fulfilled or the programs provided are not intended to meet the general good of the public, then the tax status can be revoked. There are several restrictions that are put into place for nonprofits based on their assigned tax code status, so it is important to make sure all of the rules are being followed.
3. An organization must pay application fees for nonprofit incorporation.
On the national level in the United States, it may cost as much as $850 to just apply for the nonprofit status. It may take between 6-18 months for a formal response to occur after the application, though organizations are allowed to operate under the assumption of approval. In certain states like California, a separate application and review process is required and this has another added cost.
4. No tax liabilities doesn’t mean there isn’t any tax paperwork.
The IRS currently requires all nonprofits to submit an annual filing regarding their financial status. Detailed records are required and are subject to audit at the state and national level. Some states also have separate filings that must be presented annually in addition to the IRS requirements. This means a nonprofit may wind up spending as much time on tax paperwork as a for-profit company.
5. There is shared control.
The founders of a nonprofit organization typically enjoy being able to shape the journey ahead. When the founder is a single individual, it can be difficult to cede this control to others. There is very limited personal control after the founding and recognition of a nonprofit. Sometimes several directors are required and these directors may be given the power to elect the leadership.
6. The records of a nonprofit are always open to the public.
People can always request the financial statements that are released by a nonprofit. These are considered public records and are often part of the decision-making process as to which nonprofit should receive a donation. Many websites even track the spending ratios of nonprofits.
7. Profits cannot be distributed to workers.
A nonprofit must pay their managers what is considered a “reasonable” salary. Profits cannot be divided amongst workers, even if it is done equally. A nonprofit can’t pay its Board of Directors either. Even when a nonprofit dissolves, the assets must be distributed to other nonprofits so individuals cannot personally profit from the result.
The pros and cons of nonprofit status show that it may not be right for every business. Carefully consider this status because it will affect how you do business. It could be the best thing that happens to a company or it could place limits on it that could result in losses instead.