Sooner or later, most entrepreneurs consider the possibility of launching a nonprofit enterprise.
(article continues below)
After all, the tax incentives of nonprofit incorporation seem like they are too good to be true.
But there's more to a nonprofit than tax incentives. Are you prepared to deal with everything a nonprofit has to offer?
To be fair, nonprofit and for-profit organizations actually do have a lot in common. Both types of organizations attract entrepreneurially-minded individuals focused on maximizing income, minimizing expenses, and reaching their goals.
However, that's where the similarities end. Several other factors underscore the significant differences between these organizations - differences you need to know before you decide whether nonprofit incorporation is a viable option.
The most fundamental difference between for-profit and nonprofit entities has to do with the organization's purpose.
For-profit businesses exist primarily to earn a profit for the company's owners and shareholders. A nonprofit organization, on the other hand, exists to serve the common good.
From the outset, a nonprofit organization is required to specify the manner in which its work benefits the local or global community. In an effort to take advantage of nonprofit tax incentives, startup entrepreneurs sometimes attempt to finesse their organization's mission into a nonprofit format. As you might expect, their efforts usually encounter strong opposition from federal and state government.
Unless your organization exists for a legitimate nonprofit purpose, it is going to be difficult (if not impossible) to get it off the ground.
Something else to consider is the fact that the money a nonprofit earns through fundraising and other activities can only be used to advance the organization's stated mission.
Although these activities can include administrative expenses and salaries, the limitations that apply to nonprofit expenditures are much stricter than the limitations placed on their for-profit peers. In the same way, any profit the organization earns must go back into the organization.
Unlike a for-profit venture, profits cannot be distributed to individuals within the organization since individuals cannot claim an ownership stake in a nonprofit entity. For a startup entrepreneur, this means that nonprofit status will prohibit you from reaping profits beyond a reasonable salary and benefits package.
A for-profit's assets belong to its owners and shareholders. If the business goes defunct, its assets are usually distributed to the company's shareholders according to each individual's ownership share.
But a nonprofit's assets can't be legally owned by an individual or group of individuals. Its assets belong to the organization itself. If the nonprofit ceases to exist, its assets must be distributed to another nonprofit entity.
Entrepreneurs interested in benefiting from the capital value of their organization will find nonprofit asset restrictions an unacceptable alternative to the ownership possibilities of a for-profit company.
From a financial standpoint, a nonprofit organization is definitely not the best choice for an earnings-minded entrepreneur since the earnings and asset restrictions far outweigh the tax incentives. Instead, successful nonprofit entrepreneurs are primarily motivated by their desire to make the world a better place and by their willingness to use their leadership skills on behalf of others.