Is a Nonprofit Organization Right for You?

Let’s say you are starting a new business, and you are considering what kind of business entity you will be. One type of entity you may not have considered, is the nonprofit or not for profit organization. While of course, these entities can only be used for certain kinds of businesses, if your business does fit into a category that could be considered either one, don’t pass up on the notion of forming as a nonprofit.

What is a Nonprofit?

A nonprofit organization is one whose mission fulfills a public need or a public good. A not for profit is organized for the needs of the organizers themselves (and anybody who may share in those interests)—for example, a pottery group or a pickleball appreciation group.

No Profit Allowed?

There are a lot of misconceptions about nonprofit organizations. One major misbelief is that it can’t make a profit. Many nonprofits do, and can, make significant profits. The difference is how those profits are used or expended. The owners, managers, or board members in non profit cannot make money based on the profit of the company—in other words, they can’t get a share of the company’s profits, the way they would with a traditional organization.

Owners and managers can, however, be paid a handsome salary—and many operators, directors and officers of large nonprofit organizations do make significant salaries. They just can’t be paid more than their salary, just because the company is doing well, or has a profitable year.

What to Do With Profits?

Corporate profits in a nonprofit cannot just be paid to owners of the company, the way they would be to shareholders. The money a nonprofit makes must be put back into the company, to grow the company, or further its mission.

Money and profits made by a nonprofit can be used for expansion, to pay bills, or for operating expenses. They can, to some extent, pay for benefits for owners of officers, like paying for a company car—but only if doing so directly benefits the mission of the company—these kinds of payments can’t just be a “perk” of the job.

The money doesn’t have to be used at all—it can be invested, or saved for a rainy day.

The Drawbacks

There are some negatives to a nonprofit. For example, your nonprofit organization must be run, in part by a board of directions. That means that you, as the founder or owner, may lose some level of control that you could have if you formed as a traditional business.

Because much of what a nonprofit makes is based on donations or grants, the givers of these funds expect that their money is used towards the mission of the company. This means there is more oversight on how you spend your money—and potentially, more questioning of salaries, benefits and perks that owners or officers or directors may make.

Call the West Palm Beach business litigation attorneys at Pike & Lustig today if you’re thinking of starting or forming a new business today.

Sources:

shopify.com/blog/non-profit-vs-for-profit

uschamber.com/co/start/strategy/nonprofit-vs-not-for-profit-vs-for-profit#:~:text=There%20are%20four%20key%20differences,have%20a%20separate%20legal%20entity