Determining the best business structure for a company is a big decision. The possible benefits and challenges associated with a business becoming a nonprofit should be a consideration. In many cases, this could be a good idea. It's also possible there could be some disadvantages associated with choosing this type of business structure. Learning what is involved is essential.
Advantage: Taxes
When an organization is a nonprofit corporation, they will qualify for a number of tax exemptions. These exemptions will apply to corporate income taxes and a variety of other types of taxes. This can be a huge benefit if a business anticipates making a large amount of money providing a mission-related service. This tax-exempt status can also help an organization avoid paying local, county as well as state taxes.
Disadvantage: Paperwork
The amount of paperwork required to incorporate as a nonprofit can be complicated. Many organizations hire an experienced lawyer to help them prepare all the necessary documents. There are a number of laws and regulations associated with being a nonprofit corporation. Some find all the time and energy required to comply with them quite a challenge.
Advantage: Cash Management
When an organization is a nonprofit corporation, there will be no shareholders. This means no dividends will need to be paid when a nonprofit company begins to grow. This enables the nonprofit company to keep a larger percentage of the revenue it receives. These funds can then be reinvested back into the nonprofit company. This is an excellent way to maintain a positive cash flow. It is also an effective way to help those who donate to the nonprofit company. Those who donate are permitted to write off on their taxes the amount of money they donated to a nonprofit company. This is a good incentive for those who wish to help a nonprofit organization.
Disadvantage: Location
There are certain types of nonprofit organizations that are not permitted in certain areas of a city or neighborhood. This is due to local zoning requirements. When a nonprofit wants to open in a location that is not zoned for them, it will have to apply to the local government for a variance or special approval. There are situations where residents do not want the clients that a nonprofit company serves in their neighborhood.
Advantage: Grants
A nonprofit company is able to receive a number of different private and government grants. Each one may have different eligibility requirements. A grant from the federal government is a financial award. It's is given to nonprofit companies with the understanding the funds will be used to carry out some type of public support. A federal grant is not a loan and is not considered a form of federal assistance.
Disadvantage: Limited Function
A nonprofit corporation is legally only permitted to have limited purpose. They are only able to use their cash in certain ways. There are a number of laws and regulations that cover exactly how a nonprofit corporation can spend its money. A profit driven corporation is able to spend its funds as it sees fit. Its earning can be used to benefit the corporation.
