When should a business be a “not for profit”?

Deciding the legal of form of a business requires understanding the long term intent of both the owner and the business. A common key intent is the desire to pass a business to one’s heirs. This usually rules out the use of nonprofit status for a business as the nonprofit form of organization is not inheritable.

So, why would an entrepreneur select the legal form of not for profit for the business?
Read how one business decided that being a nonprofit fit the services offered.

The mission of the organization is to provide information and support to both care takers of and individuals stricken with Lyme Tick Disease. This “business” provides support programs and links to resources to these individuals at no cost. Individuals with Lyme Tick Disease are situated across the United States and often lack access to information or support. The resource center, which is how the business defines itself, must be able to provide free assistance and yet still pay its operating costs.

As a nonprofit this “business” qualifies for financial assistance through tax deductible donations and grants from foundations and other sources. It does not pay any taxes on the monies it receives. It is only as an IRS certified entity that tax favored status can be attained. An organization must request tax exempt status and be approved by the state in which they are incorporated and the Federal Government. The assistance of a qualified attorney is recommended to complete these two applications. The cost to complete and submit the applications can be several hundreds of dollars.

The tax exempt organization must have an identified Board of Directors (BOD) which usually serves with no compensation. The BOD is responsible for the organization’s policies and compliance. They hire and fire staff which is responsible for the day to day running of the operation as determined by BOD policies and goals. This includes the Executive Director or CEO of the organization. Staff are paid and receive benefits similar to those provided by a for profit business.

The Executive Director is the chief operating officer of the nonprofit. Even though defined as a “not for profit” this business form is still a business and must conduct their operations within the rule of law. These entities can have annual excess revenue which can be held in reserve for future use. A not for profit can conduct fund raising campaigns to cover certain operating costs or building programs. These types of “businesses” must file an annual report to the state of incorporation each year and the IRS.

When the Executive Director of the resource center leave, retires or dies, even though they were responsible for creating this “business”, they can make no claims as to ownership.

Much of what has been discussed may not apply to other forms of nonprofits, such as family foundations. Contact an attorney or accountant specializing in non/not for profit business support for a more in depth or detailed discussion of the forms of nonprofit businesses.

In 2013 we explored the legal forms of business available to a business owner. For more information contact a qualified attorney. CMoynihan , 2013