Where You Are Right Now
Any change to your basic structure that moves your current for-profit business into the nonprofit sector will require some intense analysis. The core reasons that prompt the change must go far beyond your current cash flow or profit and loss statement. If that is your primary motivation, stop right now.
However, it may be that the relationship your business has with the community you serve does lend itself to a nonprofit status. You may receive a certain level of public support and your business may have an honest focus that lines up with the IRS requirements for nonprofit status.
Learn All You Can
If you are considering transforming a for-profit business into a nonprofit organization, there is a good chance you have heard the term nonprofit but never had any reason to do the research to learn exactly what is involved in starting and running one. Gather as much information on the topic as you can find. Talk to people who are involved in running nonprofits in similar fields, read books, and research websites, including the IRS site.
If you currently have investors, tell them about your plans as soon as they come together. One of the overriding rules of any nonprofit is that no one may personally benefit from the organization. Unfortunately, this is exactly what an investor does; her relationship with a for-profit entity is based upon a financial return on her investment.
It's ALL About the Money
Previous chapters have dealt with the financial elements involved in starting and operating a nonprofit organization. Once a group has incorporated and is working, the focus shifts to income sources, the stream of income, and the importance of spending money on projects and operations that are in alignment with the mission and the nonprofit regulations. For anyone considering a conversion from a for-profit to nonprofit, the sources of income are crucial.
The decision will rest on where your funding comes from (the charitable question), and you must be absolutely certain that all expenditures are in absolute compliance with the rules governing nonprofits. Unlike a start-up nonprofit, a for-profit business already has income sources and expenditures, which may not align with the rules governing nonprofits.
If you are considering changing from a for-profit to nonprofit organization in the hopes that you will be able to avoid any corporate income-tax responsibilities, stop immediately. You are on a dangerous path. You are hardly the first person to come up with such an idea, and your intentions will become very clear to any IRS personnel who review your application.
If you try to falsify your financial documents to meet standards you believe will prove your case, you will dig yourself deeper into a legal hole. When your charade is exposed (as it surely will be), it will cast a long shadow over the entire nonprofit community that has been living and working by the rules all along. It is hard enough to maintain the cash flow necessary for nonprofit organizations to do their essential work without having to answer for people who are trying to scam the system.
Financial Trouble Is Financial Trouble
If your business is struggling financially, becoming a nonprofit is not going to change very much.
Consider working up a simple side-by-side analysis of your current for-profit business and any proposed nonprofit. Look at the numbers and consider the public or community support you think would be available. Determine whether you would be able to maintain viability and meet the requirements to be a public charity.
A for-profit organization operates very much the way a nonprofit does, except that no individual may benefit financially from the work of the organization. If your supplies are costing too much, your expected fees for service are not meeting projections, or you are having trouble making payroll, becoming a nonprofit is not going to help you. If your business plan and projections are not working, adjust them to current economic realities instead of scrapping them with an eye toward reorganizing the entire organization.
From For-Profit to Nonprofit: A True Success Story
A small, for-profit restaurant/coffee shop, the Riverview Café, operated for many years. Over the past dozen years it had a handful of different owners, each drawn not so much by their desire to make vast sums of money but because of the status the Riverview had in the community. It's last owner kept terrible books, so bad that upon sale of the business, the entire incorporation process had to start from scratch. The customers never knew the difference. The place never made any real money, but did manage to stay open, pay the counter person, and keep a good supply of fresh food in the kitchen.
The Riverview hosted a weekly open mic/jam session and made the space available on weekends for small concerts, either self-produced or presented by outsiders who would pay a percentage of the door receipts to the café. Most people assumed that the café was a nonprofit, run by the core of musicians who frequented the business, even though it was not.
The decision was made to form a nonprofit organization, and have all the assets of the commercial business transferred to the nonprofit, which would then be operated by a board of directors who could (and did) hire the former owner to manage the property. This was possible as the decision was made well before the 27 months from the sale/reincorporation had run out.
The business name remained the same, although the legal ownership name reflected the change.
Because the sale of food by a nonprofit would have been unfair competition to neighboring for-profit businesses and was outside the stated nonprofit purpose of providing an arts/educational venue, a percentage of the café was determined to be nonexempt and taxes continued to be paid on that portion of the income.
The arrangement passed all the requirements set forth by the IRS, and the new organization received its nonprofit determination well within the usual response window and with only a few clarifications requested by the IRS.
Remember that converting a for-profit to a nonprofit can and does occur, but it also requires a tremendous amount of work and very likely the involvement of a creative tax lawyer.