Going Non-Profit
Being a "not-for-profit" corporation doesn't mean not making a profit!
A not-for-profit corporation isn't all that different from its profit-taking cousin. They both can, and should, be conducted with the goal of maximizing their profit-making potential. But the differences between the two types of corporations are significant enough to warrant consulting with your lawyer and your accountant. How you use the advice of your experts depends upon your vision of your business.
Why should I go not-for-profit?
You may think of not-for-profit corporations as charitable organizations or foundations, and you probably don't think of your business in those terms. But think about this: do you offer classes? performances? lecture-demonstrations? Do you give students "scholarships" or appoint more advanced students as teaching assistants in lieu of tuition? Do you have a parents' association? Do you sell T-shirts and tote bags to benefit your school? Yes? Then not-for-profit status may well be not only appropriate but advantageous.
The major advantage of the not-for-profit (also known as "501(c)(3)" after the relevant section of the Federal tax code) is that contributors and donors can take tax deductions for the value of their gifts. That does not mean that regular business corporations can't accept gifts. They can, but they probably won't be offered any. Donors have no incentive to give if they can't take a tax deduction for the gift. Lurking behind that theory of "enlightened selfishness" is the reality that no one will want to make a donation if that gift is going to inure to the personal benefit of the owner.
For the same reason, granting agencies and foundations will not entertain applications or proposals for funding from regular business corporations. As a not-for-profit, your business will be eligible to apply for grants from a host of private and public sources. For example, you may have the only school in an "underserved" area and may be qualified to provide alternative physical education classes to public school children. Without not-for-profit status, you would not be allowed to bid. Even local businesses, which you might want to approach as "sponsors" for your Nutcracker performances, are likely to seek some business benefit besides the honor involved.
Unlike a regular business corporation, a not-for-profit corporation has no shareholders and profits are not distributed. Instead, all profits are to be returned to the corporation to promote its not-for-profit purpose. Not-for-profits can hire staff, consultants, administrators, or executives and can pay their salaries. So, profits can be distributed in the form of compensation for services rendered, as salary, or fees, year-end bonuses, or through deferred compensation programs. What you can do is take a salary; what you can't do is spend your profit.
The not-for-profit is governed by a Board of Directors, not shareholders. The number of members of the Board may be determined by State statute, but the composition of the Board may be largely determined by you. Although you may be required by your State or by the Federal government (when you apply for tax-exempt status) to appoint Board members from the community, not just from among your family and friends, you are allowed to create a friendly Board that shares your vision and will support your decisions. This is important, because the Board has the authority to hire. And to fire.
So, should I incorporate as a non-for-profit?
If your corporate purpose includes educational or cultural activities or performs some public service, AND you would like to develop an additional income stream from grants or donations, AND you don't mind some additional paperwork, going not-for-profit is for you.
If, on the other hand, you don't expect much in the way of gifts and donations and you don't want to get involved in writing proposals for grants, and you don't want to be subject to a Board of Directors, or regulation by the Federal government or your State... read next month's article.