Having to pay taxes for your small business is easily one of the most painful rites of passage for any business owner. You may not want to send your hard-earned profits off to Uncle Sam each year, but, for many business owners, there isn’t really a choice.
Unless, of course, your company qualifies as a nonprofit. Nonprofits that have filed with the IRS for 501(c)(3) status don’t have to pay taxes on their income, as long as that income is related to some qualified charitable activities! Even if your company started as a for-profit business, it’s not too late to convert your small business into a nonprofit. Let’s find out how!
Table of Contents
- 1 Incorporate Your Small Business
- 2 Determine Your Business’s Nonprofit Eligibility
- 3 Revise Your Business Plan
- 4 Change Your Business Ownership Structure
- 5 Create a Charitable Trust to Own and Manage Assets
- 6 Consider Creating a New Nonprofit Instead of Converting
- 7 Corporate Social Responsibility as an Alternative to Nonprofit Status
Incorporate Your Small Business
Many small businesses are unincorporated, meaning that the owners are indistinguishable from the company. Any profits go into the owner’s pockets and any liabilities come out of their wallets.
However, since nonprofits are prohibited from distributing earnings to shareholders and owners, you will have to distance yourself from your company before you can convert it into a nonprofit. You can do this by incorporating your small business. Incorporating your company will turn it into its own legal entity, paving the way for it to become a nonprofit in its own right.
Once you’re prepared to incorporate your small business, you can initiate the process by contacting your state’s Secretary of State to fill articles of incorporation.
Determine Your Business’s Nonprofit Eligibility
Nonprofit organizations are often called “charitable organizations.” This is because nonprofits work specifically to provide services for the public good, rather than to satisfy private interests. When it comes to converting your company into a nonprofit, this means that you will have to adjust or develop a company mission that could be described as charitable.
Certain businesses, such as retailers or companies that provide B2B (business to business) services may find it difficult — if not impossible — to become a nonprofit. The nature of their business is simply too far removed from a charitable mission to qualify as a 501(c)(3) organization. However, others may find that their mission already fits the bill to become a nonprofit or could easily be tweaked to qualify.
Revise Your Business Plan
If your company’s mission is at least somewhat similar to a charitable mission appropriate for a nonprofit, then you may be able to revise your business plan so that your company can become a nonprofit. The revisions that you make should focus on diverting company attention away from profits and shareholder interests. Instead, your business should adopt a mission focused on satisfying some public good.
The IRS has detailed information on the kinds of organizations that can qualify as nonprofits.
Change Your Business Ownership Structure
In order to become a nonprofit, you will have to distance yourself and other shareholders from your business. You can remain the CEO of your nonprofit if you like and other shareholders can still have a say in your company by sitting on your nonprofit’s board of directors, but they won’t be able to collect any of the organization’s earnings. Any profit that your nonprofit company earns has to be put back into fulfilling your charitable mission. If you or any of your shareholders try to collect these earnings, you will most likely lose your 501(c)(3) status.
Create a Charitable Trust to Own and Manage Assets
One way to distance yourself from your nonprofit and its earnings is to establish a charitable trust connected to your organization. This trust will manage your company’s funds and assets, eliminating any possibility of wrongdoing that could compromise your nonprofit status.
Consider Creating a New Nonprofit Instead of Converting
The process of becoming a nonprofit can shake your small business to its core. If you’re already happy with your company’s mission and you’re going to have a hard time convincing shareholders to give up their private interest in your company, then maybe nonprofit conversion isn’t for you.
However, this doesn’t mean that you have to give up on your nonprofit dreams completely. You can still start a nonprofit from scratch instead of converting your existing company. In many ways this could be easier, since you won’t have to change the existing structure of your business.
Corporate Social Responsibility as an Alternative to Nonprofit Status
Remember that becoming a nonprofit isn’t the only way for a company to do good. Even as a for-profit business, you can still practice corporate responsibility in order to give back to the community and run an ethically-sound operation. Corporate responsibility can also qualify you for some tax benefits. For instance, businesses can receive a tax break for using energy-efficient appliances.
Converting your existing company into a nonprofit can be difficult. You will have to change many elements of your business, including your core mission and your relation to shareholders. However, even if you decide not to convert your business to a nonprofit, it’s still possible to reap some of the tax benefits by practicing corporate responsibility.
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