How to Turn a Business Into a Nonprofit
Nonprofit businesses are those that enjoy a tax-exempt status because they are focused on fulfilling a vital public need in a way that may not be possible with a for-profit business. This includes charities and educational and religious organizations. Any excess money generated by a nonprofit is funneled back into the corporation and is not distributed, unlike for-profit businesses. This requires a different fiscal structure and financing methods. Nonprofits are able to get money from fundraising, endowments and grants, but they are not able to sell shares, attract investors or pursue other capital-building avenues. This is because a nonprofit cannot offer any financial returns as enticements for capitalization and investment.
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Instructions
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Go to the Internal Revenue Service's website, irs.gov, and see if your company fits the definition of what constitutes a nonprofit corporation (see Resources). The definitions are fairly specific. Also go on your state's secretary of state's website to check its rules as well.
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Put together a business plan that spells out a vision and mission statement, an organizational action plan, sources of income and how the money will be used. While you can do this yourself, it would be best to do it with an accountant who is familiar with your state's nonprofit regulations as well as the IRS regulations. This will help guarantee compliance and prevent regulatory problems.
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Talk to any investors you have. You will not be able to earn a profit and still keep your tax-exempt status, so you cannot pay dividends or any financial returns to any partners. You may have to buy out the partners and find alternative financing.
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Develop the right organizational governance according to your state's laws. A nonprofit organization must have a board and/or slate of officers who oversee the organization. You may be an officer and be paid a salary, but there must be independent oversight.
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Incorporate your business if you are a sole proprietor. Contact a local attorney who is experienced with your state's laws on incorporation to guide you through the process. Contact your local bar association to find an attorney who is willing to do work for nonprofits at a reduced fee or for free.
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Use an attorney who specializes in nonprofits to change your corporation's status if you are already incorporated. Before it grants tax-exempt status, the IRS will want to see specific paperwork on how you have changed your corporation and its objectives to become a true nonprofit, and why. Establish bylaws that create independent safeguards for corporate behavior and provide accountability.
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Consider some of the hybrid corporations that are being created in states like Vermont and California that let you receive for-profit capitalization but still allow you to pursue nonprofit goals. You may need to incorporate in another state to do this and should speak to an experienced corporate attorney about your options.
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References
Resources
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