Modernly, an entrepreneur has a myriad of options when it comes to the legal formation of the business. The sub-categories for business entities range from corporation to limited liability companies and many others. Even with all the different sub-categories, an overarching consideration involves a decision concerning whether the business should be for profit or not. Instinctively, most people would choose the former over than the latter because they would assume that a non-for profit would not generate income. However intuitive, that assumption would be faulty.
The designation non-profit is not synonymous with the business’ potential to produce income. Instead, it is a government induced name for a business to obtain some tax benefits when it is operated for charitable interests. When a business is for profit you have a direct exchange of money for services between the customer and the business. On the other, with a non-profit the business does not receive income directly from the customer; a third party pays on behalf of the customer. That third party may be a foundation or government entities who donate to the business. In either scenario, the business will generate income.
The decision concerning which type of entity would be most advantageous depends on the type of business involved. Some business ideas will automatically push you in one direction or another. For example, an idea to create a women shelter will automatically push you toward the non-profit category and a retail store will generally push you closer to being a for profit business. There are some ideas which do not specifically fall into either category. In that case, someone may use some creative brainstorming to categorize themselves as a non-profit to benefit from the advantages that the designation affords.
Some of the advantages of the non-profit status include public funding options, tax exemption benefits and smoother operational functioning. In business operation, the designation of non-profit eliminates the interaction with the consumer for the payment of services. It allows the business to focus on the service, not the bottom line. This shift allows the consumer to view the business differently because they don’t necessarily have to reach into their pocket every time they receive service. That dynamic allows for a relationship of trust and mutual collaboration between the business and the customer.
A person who is considering filing for non-profit exemption should also consider some of the drawbacks. To begin with, the process to obtain the exemption is costly and lengthy. From the organizational standpoint, a higher level scrutiny is placed on the organization for business records. The owner also has to share control of the business with board of directors who shape and craft the bylaws and rules of the organization. Lastly, the owner cannot pocket the business’ earnings unless it is a salary which must be reasonable because the business’ financial records are matter of public records.
About the Author:
Catherine Delcin works as a business consultant empowering entrepreneurs with the necessary tools and resources to bring their entrepreneurial aspiration to success. She holds Juris Doctorate degree of law specializing in Business and has extensive experience with all aspects of business formation. Connect with Catherine at Catherine.firstname.lastname@example.org, or connect with her on Twitter at http://twitter.com/CatherineDelcin.