Should My Business Be a Non-Profit?

A lot of people think that, in order to do good in the world, your organization must be a non-profit rather than a for-profit organization. However, as we saw in last month’s blog, a non-profit organization is really just an organization that is exempt from income taxes under the United States’ Internal Revenue Code. How your organization is structured for tax purposes doesn’t necessarily have anything to do with an organization’s purpose. For-profit organizations can do charitable things and non-profits can sell products or charge for their services. 

If you are in the beginning stages of organizing, you might be wondering if you should organize as a non-profit or for-profit. Read on to see some questions you should ask yourself before deciding. 

Why am I forming this organization? 

How your organization is structured, legally, and for tax purposes, does not determine the morality of your group or limit how much good it can do in the world. If your goal is to provide an income for yourself and support your family, there is nothing wrong with being a for-profit business. Even as a for-profit, you can do charitable work and make donations. 

If your goal is to serve clients who can’t pay or whom you don’t want to charge, then organizing as a non-profit might make more sense in your situation. A non-profit can still sell products or charge some for their services. But the majority of their funds will not come from the clients they serve.

How do I want to be governed?

This short video by Christy Wright addresses this topic. In this video, she asks you to consider if you want to own the organization yourself or if you want to have a group of people (a Board of Directors) who make the decisions for you. If you own the organization yourself, you call the shots. You get to decide who you will take on as clients, what you will sell, and what to do with the money you make. If you are a non-profit, the board will decide as a group (with your input, of course), who to serve, how best to serve them, and what to do with the money you bring in. 

How do I want to get money?

In a for-profit business, the money you bring in comes directly from selling products or services to your customers. You get to set the price and the terms along with deciding which products or services you are going to sell and which customers you will sell them to. 

If you are a non-profit, your money will come primarily from fundraising. Fundraising takes many different forms and can include asking for donations or applying for grants. You can also sell products or charge your clients a fee, but this usually does not cover all the expenses you will have. 

It’s important to be aware that donations to your non-profit are only tax-deductible if you are registered as certain types of non-profit organizations such as a 501(c)3 or 501(c)4.. 

Making the Decision

Deciding how to organize is a complicated question and one with many different answers. If you are weighing the non-profit vs for-profit idea, I suggest you consult with your tax preparer and an attorney to fully understand the implications of both options. They can help you decide which would be best for your situation. 

Either way, you still need to keep good financial records. Once you are organized, send me a message and we can work on getting your financial records set up and on the right track.