Nonprofit Myths: #5 - Change to Nonprofit?

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Starting and running a 501(c)(3) tax exempt nonprofit is a lot of work and not everyone is cut out for it. Some go into the venture with false assumptions and myths and only later find out they didn’t understand what they were getting themselves into. Let’s examine some of those myths.

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Myth: I am going to convert my for-profit business to a nonprofit business.

Truth: Before you think about “how,” it’s worth spending a minute or two on “why” you would make such a decision. Does your current business carry out activities that would qualify for tax-exempt status with the IRS (that is, charitable activities)? Do you imagine that a nonprofit would mean fewer regulations and less administrative red tape? Do you think about conversion because you want to give back to the community?

Conversion is not “simply” a matter of changing your status with the IRS when you file tax returns (yes, most nonprofts have to file an annual form 990). If your business is incorporated, you’ll probably have to dissolve the for-profit and submit new paperwork for the nonprofit. And most important, when you move to nonprofit status you turn over revenues to a board that makes sure it’s for approved charitable purposes only.

Moral of this myth: There are perhaps other, better, simpler ways to be in business and do good work in the community. Consider keeping your business and the profit it makes. Then, launch a new organization, a nonprofit, and use some of your profits to support the nonprofit’s work. The two organizations are separate on paper even if you’re involved in both. Ownership and benefits work this way: a nonprofit can benefit from the for-profit, but the for-profit cannot benefit (or own) the nonprofit. Nonprofits have no owners. They exist for the broad public good, whereas a for-profit exists to benefit a limited number of people (e.g. owners and investors).

So run the for-profit business effectively and donate some of the proceeds to the nonprofit. You can’t call them by the same name but they could be similar (e.g. an educational tutoring business called Education Ventures might be affiliated with a nonprofit called Education Adventures). You could even operate the two business from the same space, use the same furniture, etc.. The important issues are income, ownership, corporate purposes and tax filings. These hurdles usually make it less appealing to go ahead with a conversion.

 

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"Nonprofit Myths" is a 12-part series by Dr. Kitty Bickford, founder of Pasture Valley Children Missions. As a nonprofit consultant, Dr. Bickford has provided guidance to thousands of nonprofit leaders in best practices for setting-up and effectively running their organizations. We're also proud to claim Dr. Bickford as an alumna of The Grantsmanship Center. 

© Copyright 2020 Kitty Bickford, DBS, CPC     Used  with permission

 

For further delight and edification, here's a short series on board development:

Who's On Your Board?     Where Can You Find Board Members?     What Does a Board Do?

 

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