I started a 501(c)(3) nonprofit social welfare agency 15 years ago and in the last several years its annual revenue has grown beyond $350,000 with its annual surplus on track to increase. I funded the agency through the first five or six years and worked other jobs to keep it afloat. I am now more than 70 years old and concerned about succession planning, but also about my personal financial security. I don’t make a big salary and have little available for retirement. Nearly all our income comes from court-ordered services we provide. I have a small board of supportive friends and colleagues. Our consultant suggests converting the nonprofit to a for-profit so that I can better control the agency and sell it if I may want to. I don’t know how to best proceed since I also want to have a new Program Director work with me and assume my responsibilities within the next year or so. —From the Website.
Founders unfortunately often find themselves in your position, having worked years as volunteers (or worse, as prime donors) and not providing adequately for their own retirement. Conversion is probably not the way to go now, however.
If you actually converted the existing entity from nonprofit to for-profit, it would probably be deemed to be a sale at fair market value for federal income tax purposes, with significant taxes immediately due. It would also raise fiduciary questions about who would own the stock of the entity after the conversion and possibly issues with your state Attorney General. You might also find that the courts are no longer as willing to order the services of a for-profit entity.
The more normal way for a founder to take control of a charitable operation is to buy the assets of the organization at fair market value and then operate the business as a sole proprietor. That requires payment up front to the charity (which may continue as a grant-making foundation making grants for the original purpose of the organization) and a relatively long work horizon for the founder to recover the purchase price through the founder’s personal services and possible ultimate sale at a profit.
For those with a shorter work horizon, it may be better to work with your board to increase your current compensation (without creating an excess benefit) and to play catch-up toward maximum contributions to any retirement plans and individual retirement accounts that may be available, or created, for you. If you continue to work actively for a few years and then retire with a legitimate consulting contract, you may be able to provide reasonably for your retirement.
A third probably more remote possibility might be to transfer control of your organization to some mega-nonprofit setting out to acquire control of a string of organizations that do what you do and to work out a plan for your personal financial security as part of the commitments for affiliation. That happens occasionally with mental health organizations or those dealing with developmental disabilities but may not be available for your line of work.
You should work closely with consultants who could help compare your options, considering not only the economic numbers but your willingness to do the work required in each of the scenarios. The sooner you can move along a specific path, the better.
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