Could a Non-Profit Structure Be Right for Your Business?

If you have a business idea, or an idea for a service for your community, there's one decision you must make early on: are you going to structure your project as a for-profit business, or as a non-profit corporation?

Now, it may be that you already have a clear idea about this. Some business ideas are clearly "for profit". For example, if you want to sell insurance, or stocks, that's undoubtedly a for-profit business. On the other hand, if you want to raise money for research into a cure for juvenile diabetes, that project will best be served by forming a non-profit corporation.

One difference between for-profit and non-profit organizations is that grants funding is generally reserved for non-profits. Some grants are available to for-profits (and to individuals), such as government grants to promote affordable housing or job creation in economically depressed neighborhoods. Most grants, however, and particularly grants from foundations, are given only to non-profit corporations designated by the Internal Revenue Service as 501(c)3 corporations.

In many cases it is not so easy to determine into which category a business idea should fall. One question to ask is: will my planned project deliver a service to clients? A beauty shop located in Beverly Hills, catering to wealthy women, is certainly a service business. The clients, however, are not needy. They can easily pay for the service without assistance.

So the second question to ask is: will the project assist clients who are in need? A beauty shop located in a Medicaid-supported nursing home will serve clients in genuine need - clients who could not pay for this service from their own resources.

What are the benefits of a for-profit business model? Well, first of all, the owner of the for-profit business holds personal (or corporate) title to the business and all its assets. Any money that is made by the business can be used according to the discretion of the owner. The owner can borrow against the business, or sell it and keep the profits. When the owner dies, he or she can leave the business and/or its assets to his or her heirs.

For-profit businesses exist not just to support the owner, but also to build wealth. So if you have a business idea that has the potential to build wealth for you, I recommend you stick with the for-profit business model. For example, if you have designed a widget that is apt to revolutionize its market niche, and you hold the patent, by all means produce and sell it through a for-profit business. That widget could make you rich, while offering a great benefit to your customers.

Does this mean that non-profits can't earn money? Not at all. In fact, I always encourage my non-profit clients to look for ways to become self-supporting. Many non-profit agencies generate income through contracting with other organizations to provide services. Other agencies operate businesses such as thrift stores.

The difference is that the income generated by a non-profit organization always belongs to the non-profit agency, not to the organization's founder. If the non-profit organization decides to cease operations, its assets, by law, must be donated to another non-profit agency.

While a non-profit organization may not generate wealth for its founder, a non-profit can be a vehicle that provides a very good ongoing income. Many people create non-profits to do work they love, and to create a job for themselves. The founder of a non-profit organization can become the agency's Executive Director, and draw a salary that is comparable to salaries in the for-profit sector. In some cases, the founder may choose to occupy another staff position, and turn ongoing management over someone else who functions as Executive Director.

There is also a third possibility, one that I call a dual for-profit/non-profit structure. If you have a business that provides a service that could potentially be made available to clients in need, this structure may work for you. For example, if you teach painting, you may want to charge some clients a high fee for art lessons. But you could also teach painting to disadvantaged children, and use grant funds to reimburse yourself for the work.

In order to use this structure, you could join forces with an existing non-profit, such as the YMCA, and assist them in writing a grant to underwrite art lessons. You could also set up a new non-profit agency devoted to providing arts education to needy children, enlist interested people to operate the agency, and contract with that agency to be paid for teaching. This dual for-profit/non-profit structure can work for a variety of different businesses.

Jillian Coleman Wheeler is a Grants and Business Consultant to businesses and non-profit organizations. Her website, http://www.GrantMeRich.com, is a resource site for entrepreneurs, grant writers and consultants, and offers online training for grants consultants. She is also author of The New American Land Rush: How to Buy Real Estate with Government Money. For more information, visit: http://www.NewAmericanLandRush.com

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