5 Things to Consider Before Registering Your Startup as a Nonprofit
Nonprofit organizations are eligible for perks not granted to for-profit businesses. Those perks are designed to keep costs low so nonprofits can spend as much money as possible helping others. If you’re thinking about registering your new business as a nonprofit, you likely already have a business idea that fits the concept. Specifically, this means you would be seen by the IRS and consumers as a charitable organization.
Before you file your papers, though, it’s important to fully understand the pros and cons of incorporating as a nonprofit. It isn’t for everyone and you may find that the strict structure isn’t the right business model to fit your personal work style. Here are a few things to consider before you register your business.
1. IRS qualifications.
Nonprofits receive tax exemptions not seen by other business types, which means they must meet the IRS’s definition of a 501(c)(3) organization. The IRS sees a nonprofit as charitable, religious, educational, scientific, literary, testing for public safety, fostering amateur sports, or preventing cruelty to children or animals. If your startup will exist solely for the purpose of helping others, you’ll likely qualify as a nonprofit in the IRS’s eyes. As a nonprofit, however, no share of your business’s earnings can go to a private shareholder or individual. You’ll be able to pay a salary to yourself and your employees, but you won’t be able to make a profit from your successes.
2. Shared control.
Many startup founders relish the thought of running their own businesses. Nonprofits rarely are one-person operations, which means that founders will be expected to share leadership with at least one other person, often in the form of a board of directors or an advisory council. This governing authority lends credibility to a nonprofit, since consumers will see that the organization is answerable to an experienced group of advisors and this increased trust means that they’ll be more likely to donate funds and volunteer to help. It also gives new nonprofit founders the support they need as they make tough early decisions. Before you file your papers, be sure you have your board lined up.
3. Open-book requirements.
One of the toughest parts of running a nonprofit is the requirement of transparency at all times. Even if you have nothing to hide, you may find the possibility of scrutiny disconcerting. A nonprofit’s books may be subject to audits from associated parties, including board members and the IRS. Some organizations require nonprofits to have independent auditors review their books, especially nonprofits that accept funding from government agencies. All of this scrutiny may make it necessary for a nonprofit owner to hire an accounting professional to set up and maintain the business’s books.
With all of those cautionary words, many charitable organization founders enjoy numerous benefits as a result of filing as a nonprofit. A nonprofit will often be granted tax-exempt status, for instance, allowing them to preserve any incoming money and put it toward meeting their goals. A nonprofit also pays special prices for postage, which lets it launch large mailings at affordable prices. There are other perks, as well, offering significant discounts on some of the tools other businesses use for marketing and day-to-day operations. On a local level, nonprofits may find that they receive special invitations to events and get discounts on local marketing efforts such as booth fees at community fairs.
Most nonprofit owners would say the biggest benefit of all to a nonprofit has nothing to do with money. The work itself is rewarding, they say, especially if they run organizations that change lives. Seeing the fruits of the labor they do often leads everyone working for nonprofits to find gratification that goes well beyond the salaries they’re paid. They see, day after day, that what they do makes a difference in the world, whether it’s providing clothing to needy families or raising money to find a cure for a life-threatening disease. For business owners that have a particular cause for their new startup, the decision to file for nonprofit status is one that is already made based on the type of business they’ve chosen to start.
If you’re thinking about starting a nonprofit, consider talking to other 501(c)(3) founders to learn as much as possible about the benefits and complications of running one. You’ll know what to expect before you file your papers and be fully prepared to tackle the many challenges.