Many business owners take pride in serving their community. But what if you want to turn your small, for-profit business into a nonprofit? Read Chisholm Law Firm’s blog to learn more about converting a for-profit business into a nonprofit.
What’s the difference between a for-profit and a nonprofit?
It may seem like a simple difference, but for-profits and nonprofits vary greatly – not just in tax code. For example, for-profit businesses exist to generate profit by selling goods or services to consumers, while nonprofits aim to promote and advocate social causes.
These organizations also have different styles of leadership. A for-profit company distributes leadership amongst individuals who have a stake in the company’s financial success. On the other hand, a board of directors guides a nonprofit towards its goals, which are not necessarily monetary.
When looking at converting your for-profit business into a nonprofit, it’s crucial to keep these two differences in mind. When restructuring your organization, you will need to consider the purpose, profit, and leadership style.
Benefits of a nonprofit organization
One of the key benefits of converting your for-profit business into a nonprofit is tax exemption. Nonprofits with 501c3 status are exempt from paying federal income tax and can receive tax-exempt charitable donations.
Nonprofits also have limited personal liability. Limited personal liability means people cannot sue you, your board members, and your volunteers for the nonprofit’s actions. You also can’t be held personally liable for any debts that your nonprofit incurs.
Another benefit involves your legacy. You are creating your legacy when you convert your for-profit into a nonprofit. Nonprofits often last beyond their founders and continue giving back to their communities for many years.
Drawbacks of a nonprofit organization
While converting into a nonprofit has many benefits, there are also some drawbacks. For one, it can be a tricky process. The IRS does not like it when for-profit businesses become nonprofits, as this is an easy way to avoid paying taxes. You may have some difficulties when you first start.
You also lose some of your power over the organization. Because nonprofits are run by a board of directors and not individuals, you will lose some control over the goals and activities of the organization. However, you may still have some say as the organization’s founder.
Lastly, you won’t make the same amount of money. Even though you can still earn a reasonable salary from a nonprofit, you likely won’t earn what you would have had you stayed in a for-profit business. If money is a significant factor in your decision, you may want to reconsider.
How to convert your for-profit business into a nonprofit
Now that we’ve discussed the differences, benefits, and drawbacks of turning your for-profit business into a nonprofit, we can look at how to convert your organization.
Define your purpose
First, you will need to define the purpose of your new nonprofit. While a for-profit exists to generate revenue, nonprofits serve a social cause. You will need to decide the nonprofit’s reason for existing and its mission.
Choose a name
Choosing a name is crucial for converting your for-profit business into a nonprofit. If you don’t plan on using your existing business’s name, you will need to develop a new one. Try to choose a memorable name that matches your purpose.
Determine your eligibility
After defining your nonprofit’s purpose and choosing a name, you must determine its eligibility by researching Section 501c3 of the Internal Revenue Code. You can also assess your eligibility by contacting your state’s charity officials or scheduling a consultation with Chisholm Law Firm.
Create a business plan
You may think that business plans are only for companies that generate revenue – but that couldn’t be further from the truth! You will need to create a business plan to cover who your nonprofit will serve, where you will operate, how you will fundraise, and any other details necessary for running your nonprofit.
Write the bylaws
Your nonprofit’s bylaws are the primary governing document for your organization and should include your policies, procedures, and the rules that govern your board of directors. It should also cover your purpose, an outline of your board structure, a list of your officers, and a schedule of board meetings.
Incorporate your organization
To incorporate your nonprofit, you must file the appropriate paperwork with the state. Your articles of incorporation serve to establish your organization as a legal entity and are required to file for 501c3 tax-exempt status.
File for tax exemption
At this point, you’re ready to file for 501c3 tax-exempt status with the IRS! You must file a Form 990, Form 990-EZ, or Form 990N. This stage can quickly get complicated, so you may benefit from speaking with an experienced nonprofit attorney.
Apply for a trademark
One of the last steps to converting your for-profit business into a nonprofit is to apply for a federal trademark. A federal trademark has many benefits, including preventing others from using your name and making monitoring your nonprofit’s reputation easier.
Speak to an Expert
Converting your for-profit business into a nonprofit has many incredible benefits, like preserving your legacy and serving your community. However, the transition can quickly become challenging. That’s why the attorneys here at Chisholm Law Firm are here to help.
Chisholm Law Firm has helped thousands of people start and grow nonprofits that impact the world. If you want the best for your nonprofit, look no further than Chisholm Law Firm. Our clients have a 100% success rate for nonprofit and trademark filings*.
You can rest assured that your nonprofit is in the best hands and that we’ll get everything done right the first time. Call us today to schedule your free consultation.
It shouldn’t be this hard to be a superhero.
*Past results do not determine future outcomes.