Different types of business structures have different implications for your business.
In that location are several cardinal differences betwixt these iii business organisation entities, from profits that stalk from doing good in the community to paychecks that come from fundraising. — Getty Images/SDI Productions

When you're starting a business organisation, it'due south probable y'all'll hear the phrases "nonprofit" and "not-for-turn a profit" thrown around. It's likewise easy to assume these two terms hateful the same thing. All the same, nonprofits and non-for-profits are business structures with different revenue enhancement implications, governance and functions. Both of these entities dissimilarity with for-turn a profit organizations. Here are the ins and outs of what all these terms hateful so y'all can effigy out which structure is right for your new venture.

[Read more than: Getting Ready to Launch? How to Cull the Right Business organization Structure]

What is a nonprofit system?

A nonprofit organization is one that qualifies for revenue enhancement-exempt status by the IRS because its mission and purpose are to further a social cause and provide a public do good. Nonprofit organizations include hospitals, universities, national charities and foundations.

[Read more: Education, Partnerships and Community Are Essential to Nonprofit Success]

To authorize every bit a nonprofit, your business must serve the public good in some way. Nonprofits practise non distribute profit to anything other than furthering the advancement of the organisation. As such, you will exist required to make your fiscal and operating information public so that donors can see how their contributions are beingness used. An individual or business that makes a donation to a nonprofit is allowed to deduct their donation from their tax render. The nonprofit, likewise, pays no taxes on any money received through fundraising.

What is a not-for-profit organization?

Like to a nonprofit, a not-for-profit organization (NFPO) is one that does not earn profit for its owners. All money earned through pursuing business concern activities or through donations goes right back into running the organization.

However, not-for-profits are not required to operate for the benefit of the public adept. A not-for-profit can simply serve the goals of its members. A good case is a sports guild; the purpose of the club is to exist for its members' enjoyment. These organizations must apply for taxation-exempt status from the IRS, including exemptions from sales taxation and property taxes. That as well ways that money donated by an individual to an NFPO cannot be deducted on that person'due south revenue enhancement render.

Nonprofit vs non-for-profit organizations

There are four key differences between a nonprofit and a not-for-profit:

  • Nonprofits are formed explicitly to benefit the public good; not-for-profits exist to fulfill an owner's organizational objectives.
  • Nonprofits tin accept a split up legal entity; not-for-profits cannot have a separate legal entity.
  • Nonprofits run like a business and try to earn a profit, which does not support whatsoever single member; not-for-profits are considered "recreational organizations" that do not operate with the business goal of earning revenue.
  • Nonprofits may accept employees who are paid, but their paychecks practice non come through fundraising; not-for-profits are run past volunteers.

Nonprofits are granted 501(c)(3) status past the IRS. NFPOs are also governed by IRS tax code department 501(c), simply depending on their purpose they could autumn under a different department, like section 501(c)(seven).

What is a for-turn a profit organization?

A for-profit organization is i that operates with the goal of making money. Most businesses are for-profits that serve their customers by selling a product or service. The business possessor earns an income from the for-turn a profit and may also pay shareholders and investors from the profits.

Whether you decided to kickoff a for-profit, not-for-profit or nonprofit, the first steps to creating your entity are the same. Start by filing for a business concern entity in the state in which you wish to run your operations. Your business entity might be a corporation, LLC, sole proprietorship or partnership.

Once the entity has been formed, you lot will apply for an Employer Identification Number (EIN) with the IRS. It'southward during this pace that you lot will select your revenue enhancement-exempt status using Course 1024 if you wish to run equally a nonprofit.

Some businesses starting time equally ane type of legal entity and subsequently determine to convert to some other.

Can y'all change your legal entity?

Some businesses start every bit one type of legal entity and later decide to convert to some other. This is possible, but information technology's a lilliputian complicated depending on the types of entities involved.

From nonprofit to for-turn a profit

At that place are a few reasons why you may wish to change from a nonprofit to a for-profit. Mayhap you believe you lot can get amend access loans or other funding by becoming a for-profit. Or peradventure you lot prefer to operate without the regulations that govern nonprofits.

Regardless, one time you've advisedly considered this option and all shareholders are in agreement, you volition need to notify the IRS by writing a "statement of nonprofit conversion." This statement volition include:

  • The reason for nonprofit termination;
  • A certified copy of a liquidation program;
  • The fair marketplace value of the organization;
  • A list of all asset recipients if avails will be distributed.

You lot volition too need to contact your land and local representatives to make full out any forms required in your specific jurisdiction.

From for-profit to nonprofit

Converting a for-profit to a nonprofit is a picayune more difficult, equally the IRS wants to discourage businesses from making this move to avoid paying taxes. It can be done, all the same, through a process that isn't and so dissimilar from starting a nonprofit from scratch.

"While you lot may be able to retain the for-profit organization name for use by your nonprofit, a nonprofit organization requires you lot to use the money you raise to arrange a purpose other than distribution to shareholders or business owners, and information technology needs to fulfill the mission and goals of the nonprofit," explained Small-scale Business Chronicle. "Transitioning to a nonprofit organization requires you to do some planning prior to registering the nonprofit with the state in which it operates."

This transition includes writing a mission argument, establishing bylaws, and filing articles of incorporation with your Secretary of State, amidst other things. Information technology's at the manufactures of incorporation step that y'all volition need to let the Secretarial assistant of State know yous're keeping the same name as your existing for-profit.

Which legal entity is the all-time?

Ultimately, the legal entity that's right for your concern depends on your goals. Equally one entrepreneur, Jane Chen, outlined in Harvard Business organisation Review, at that place are pros and cons to each entity.

"A for-profit tin raise money from individual investors, for which it must give equity or dividends to shareholders; ultimately, a return on investment is expected," she wrote. "A nonprofit, on the other hand, can seek donations from individuals, foundations and corporations. Such stakeholders generally look a 'social render' on uppercase."

There's no one-size-fits-all when it comes to establishing a legal entity for your business. And, the practiced news is you tin always change your entity every bit your business organisation grows. Speak to an proficient who can help you choose an entity that optimizes your tax deductions while serving your overarching goal.

CO— aims to bring you inspiration from leading respected experts. However, before making any business decision, you should consult a professional person who can suggest y'all based on your private situation.

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Published April xx, 2021