Can I Operate my Business as a Non-Profit? Probably not, but it's important to understand exactly what one is.

By Jeffrey Steinberger

entrepreneur daily

Opinions expressed by Entrepreneur contributors are their own.

People own and operate various business entities. Some organizations operate as non-profits. What is a nonprofit? Can you conduct your business as a nonprofit?

The answer is that a business organization cannot be operated as a non-profit, although some non-profits may look like businesses. Generally, the purpose of a business entity is to benefit the owners or principals of the business by earning them a financial profit. A for-profit business organization can take any of the common legal forms, such as corporations, limited liability companies, partnerships and joint ventures. Thus, a for-profit corporation exists to financially benefit its stockholders by the payment of dividends, and an unincorporated entity, such as a partnership, exists to financially benefit its members by the distribution of income.

Rather than earning a profit for its owners, a non-profit is an organization that has no owners and that has as its purpose the promotion, advancement and achievement of a specific mission. Like a business, a non-profit can take the form of a corporation or an unincorporated group of persons banded together to achieve their mission. The missions of non-profits can be as varied as the human experience. For example, non-profits are formed to advance local, national or international missions such as charitable work, disease prevention, humanitarian relief and environment goals. Non-profits also can be as simple as a group of concerned citizens who want to fund a neighborhood watch or parents who have bake sales, car washes, or pancake breakfasts to earn money to finance their children's little league teams or scout troops. In each of these cases, the mission is not to enrich the operators of the charities or the involved parents, but to accomplish a mission.

A properly organized and operated non-profit that serves the public interest may be exempt from state and federal income taxes. To ensure eligibility for non-profit status and tax exemption and to avoid abuse, state and federal accountability rules must be followed, including reporting requirements and control by a disinterested or independent board of directors.

If a non-profit wants to receive tax-deductible contributions, the mission must be broad enough to benefit the general public. If the purpose is charitable but only a limited number of people are helped, the non-profit may be exempt from income taxes, but not be able to receive tax-deductible charitable contributions. For example, non-profits called "mutual benefit" organizations can benefit their members, such as condominium associations or social clubs. Other non-profits may benefit businesses or residents of certain geographical areas, such as chambers of commerce and professional associations (e.g., the American Medical Association). Since these non-profits benefit individuals to a large extent instead of benefiting society at large, they may be exempt from income taxes, but donations are not likely to be charitable deductions.

Non-profit does not necessarily mean free labor. While many nonprofits are driven by self-sacrificing volunteers, there is no legal reason why suitable offices may not be maintained or why officers and employees may not receive substantial salaries and the usual employee benefits, so long as the compensation is reasonable and appropriate given the mission, the activities of the non-profit and the efforts of the employees on behalf of the organization.

Serving the public good and advancing worthy causes has rewards for the individual and for society. Bear in mind, however, that non-profits are governed by federal and state laws, rules and regulations. The latter vary from state to state. Altruism must be tempered by prudence, and it is always prudent to seek and rely upon knowledgeable tax and legal advisers when undertaking any substantial activity.

Jeffrey Steinberger is a veteran trial attorney and the founder and senior partner of The Law Offices of Jeffrey W. Steinberger , a Professional Corporation in Beverly Hills, California. He is also a renowned celebrity attorney, TV legal commentator and analyst, federally appointed SEC arbitrator and professor of law.

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