What is your reason for existence?
That's quite the heavy question! Don't worry, we aren't asking you to solve an age old philosophical question. Rather, you must determine whether the primary purpose of your organization is to generate income for you, as the owner, and your employees--or are you forming an organization to serve a humanitarian or community need? Is the business something you want to control, primarily to the benefit of the owners of the organization? Or are you willing to form a business for the benefit of the community as a whole? Nonprofit organizations must use their income to create programs and services for the greater good. For-profit companies offer products and services that are valued in the marketplace, choosing to distribute profits between owners, employees, shareholders and the business itself. Bottom line, nonprofit organizations are not set up for the sole purpose of making a profit, but for pursuing a public benefit recognized under federal and state law. For-profit companies are formed for the financial benefit of its owners and/or shareholders.
Where are you getting your funding?
Are you primarily receiving your funding from sales revenue? Or is your organization's main source of income from donations and fundraising? For-profit companies rely on earned income and credit arrangements with lenders and suppliers to finance their operations. Nonprofits, on the other hand, rely almost entirely on donations and grants from individuals, government entities and organizations. To get back to the misconception mentioned at the start of this article, nonprofit organizations can and do make a profit, but it must be used solely for the operation of the organization.
Who do you envision owning and controlling the organization?
One question we often ask clients at the crossroads of the for-profit/nonprofit decision is: Do you envision your organization continuing on, for the benefit of the community, with or without you personally involved? A nonprofit organization is, in a way, owned by the public. It belongs to no private person and no one person controls the organization. The assets of a nonprofit are irrevocably dedicated to the charitable, educational, literary, scientific, or religious purposes of the organization. This is why, if the organization dissolves, any remaining assets after debts and liabilities are satisfied, must go to another nonrofit organization and not to members of the former nonprofit or any other private individual. This is in contrast to a for-profit organization, where private owners can retain control and ownership of the entity. Similarly, the for-profit corporation can distribute any assets of the corporation upon dissolution to the owners and shareholders, after paying all debts and liabilities. And while you may be the founder of a nonprofit corporation, control of a nonprofit is exercised by a governing board of directors or trustees. The responsibility of that board is to see that the organization fulfills its purpose.
What about accountability?
Nonprofit organizations have public accountability and must file annual information returns with the federal and state governments. At the state level, nonprofits are usually overseen by the State's Attorney General. That office usually has the power to take a nonprofit corporation to court to make sure it complies with the law.
This is just a brief overview of some of the more important considerations in the formation of a for-profit or nonprofit organization. Assistance with nonprofit entity formation and tax exempt applications are considered on a case-by-case basis, based on the applicant's level of preparedness and organization. Applying for tax exempt status under Section 501(c)(3) of the Internal Revenue Code requires thought, preparation, and organization; and is not something that should be taken lightly. The Legal Creative will attempt to place qualified organizations with a Volunteer Lawyer who has agreed to provide services on a pro bono or reduced fee schedule only if the the organization can demonstrate the following:
-A clear mission and programming that furthers a charitable purpose
-An appropriate board of directors
-Adequate fundraising to cover incorporation and application fees
-A clear financial plan spanning at least three years
For more information on nonprofit entity formation and tax exempt application assistance, please email firstname.lastname@example.org.