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Things to Consider for a Non-Profit Business Model
Not all business ideas fit squarely in either the for-profit or non-profit realms. Deciding which business model to pursue requires some consideration of your specific situation, including your access to both financial capital and human capital. The most significant benefit to starting your business as a non-profit is the ability to turn your altruistic vision into a means to make a living – you can turn your passion into your career. Beyond that, the realities of operating as a non-profit are for you to consider as you move forward in the choice of entity process:
FAVORABLE TAX TREATMENT
State tax exemptions: Incorporating as a non-profit exempts the organization from certain state sales and use taxes.
Federal tax exemptions: Further qualifying with the IRS as a 501(c)(3) tax-exempt organization allows for exemption from federal corporate and income taxes for most types of revenue, as well as allowing donors to deduct the donations from their taxable income, encouraging the inflow of donations.
Personality of an applicant: In terms of attracting employees, a non-profit has the ability to screen candidates based on their personal convictions for the organization’s mission, ensuring a motivated and dedicated staff.
Qualifications of an applicant: While a non-profit can attract motivated employees, the lack of a competitive benefits package may result in qualified talent looking elsewhere. In addition, the non-profit traditionally has a lot of entry-level and volunteer job duties that are filled by a broad range of candidates.
FINANCING YOUR ORGANIZATION
Fundraising: It is necessary to finance the organization by fundraising rather than traditional product sales.
Grants: A non-profit is eligible to receive government grants, some of which are set aside exclusively for non-profit organizations.
Board of directors: All decisions, both strategically and financially, must be agreed upon by the board of directors. For an entrepreneur with a background in sole proprietorship, this loss of managerial autonomy may be tough to adjust to.
Incorporation: The process to incorporate a non-profit is generally the same as incorporating a traditional for-profit organization, but there are several additional steps, such as including in the bylaws how the board of directors will be elected.
Maintaining state and federal tax exemption: After the additional initial paperwork is filed, there is a lot of paperwork involved in maintaining the non-profit status as the organization’s mission is underway. The additional paperwork is to ensure to the state and to the federal government that the organization’s business activities continue to align with the relevant regulations. The increase in paperwork for maintaining a non-profit status and a 501(c)(3) exemption may require outsourcing the task to an attorney and/or an accountant.
POLITICAL ACTIVITY RESTRICTIONS
Is lobbying a part of the organization’s mission? For an organization that has obtained 501(c)(3) tax exemption, there is a strict limitation to the political activity allowed. If part of the organization’s mission includes lobbying, it is necessary to consult with an attorney to ensure that the non-profit is following the applicable regulations.
These considerations can vary from case to case and may tip the balance in favor of pursuing either a non-profit business model or a traditional for-profit business model. Keep reading The Startup Garage’s blog series on Starting a Non-Profit Organization for more information on how to get your non-profit up and running.