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Should I start company as nonprofit?

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Should I start company as nonprofit?

I am beginning my company and trying to decide if it should be a nonprofit. We intend to give away all profit past capped salaries of all staff, once we're up and running. But our salaries will come from the "dues" of those we have trained and supported. Can a nonprofit organization require a commitment from those we have trained to send in a yearly donation of $100, and also require them to submit a work for hire every three years, as their dues to the organization?

When you say nonprofit, I assume that you mean a 501(c)(3) charity.  (See Ready Reference Page:  “What Do We Mean When We Say Nonprofit?”)  There is seldom a reason to set up a nonprofit to pursue economic objectives without seeking 501(c)(3) status.  It isn’t clear that you would qualify as a charity from what you say, however.  Charitable exemption is based on what you do as an organization, not where your profit ultimately goes.  (See Ready Reference Page:  “IRS Has Generally Expansive View of ‘Charitable’”)  It is not clear that your “training” will qualify as charitable.  In addition, if your business plan allows you to support yourself and show a profit solely from the “dues” you collect from your students, the IRS might also say that your operation is so commercial that it doesn’t qualify for charitable exemption.

You could charge “dues” as you describe them either as a nonprofit or a for-profit, but don’t confuse a required “donation” with a charitable contribution.  As soon as it is “required,” it is a fee for service, no longer voluntary, and no longer eligible for deduction.  You may also find that it becomes more difficult to collect these dues as the students get farther from their training, and it wouldn’t be cost effective trying to sue to collect $100.

My bottom line on choosing between a nonprofit organization and a for-profit business is based on whether you need to obtain grants and contributions to make your operation work.  If it will be profitable without the grants and contributions, there is probably no need to form a nonprofit and seek 501(c)(3) status that allows you to seek those grants and contributions.  If you do, you may get the “halo effect” of nonprofit status, but you give up the substantial economic opportunity that comes from ownership and the ability to sell your business at a profit when you decide to leave it.

Before I started anything like this, I would discuss the business plan with someone who understands business start-ups and someone who understands charitable exemption.  That may be two people rather than one, but they can give you practical insights based on their experience that might make your whole operation more effective.

Tuesday, June 23, 2015

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