We met Heather* in a conference room at our office, which is a former Ford factory.
We immediately knew we were in the presence of someone who was enthusiastic, which reminded me of a quote from Mr. Henry Ford himself — enthusiasm is the sparkle in your eyes, the swing in your gait. The grip of your hand, the irresistible surge of will and energy to execute your ideas.
Heather fit Ford’s definition of an enthusiastic person. She had a great idea and the will to make it happen.
Her idea was to create a nonprofit which incorporated a for-profit model. If you have a similar idea, then you might also have a similar question to Heather’s, which was: Do I structure the organization as a 501(c)(3) nonprofit or an LLC?
Let’s elaborate.
Her dream is to help people who have had a limb amputated, whether from accident or illness. She hoped to provide resources and information about the procedure, create a community of support, and give grants for surgical costs, prosthetics, and more. It seemed like a nonprofit would be a good structure.
Then, as a means of funding the organization, she created an exercise plan for people in recovery, so they can adjust to their new normal, but still be active. She plans to sell the exercise plan in addition to offering programs and supporting a network of amputees. Maybe an LLC would be a better option?
There are several ways Heather could lay her foundation.
- Establish a nonprofit
- Heather could sell the product and then reinvest the revenue into programming, or donate products to underserved areas, or give research grants, etc.
- Establish an LLC
- She could sell the product. If she wanted a social impact aspect to her business, she could then donate a portion of her profits to a nonprofit that works toward a similar mission.
- Establish both!
- She could establish an LLC that sells her product, then she could establish a nonprofit. Heather could donate a portion of her profits from the sale of her product to her own 501(c)(3), which could run programs, donate her exercise plan to underserved areas, apply for grants, etc.
What’s what?
The main difference between a nonprofit and for-profit is this: a nonprofit spends their earnings inside the organization (Girl-Scout cookie sales support Girl Scout Summer Camps and other programs); a corporation spends their earnings outside the business (Starbucks’ profits are returned to the stockholders of the company).
Again, let’s elaborate. Here are a few benefits of nonprofits and LLCs, along with some potential drawbacks of which you might consider.
IRS registered 501(c)(3) nonprofit organization benefits:
- Eligibility
- Many foundations and government agencies limit their donations and grants to 501(c)(3) organizations.
- Liability
- Creditors and courts are limited to the assets of the nonprofit.
- Founders, directors, members, and employees are not personally liable for the nonprofit’s debts.
- Tax deductions
- Nonprofits can offer them to individuals or business that give donations, gifts, or in exchange for services, which creates a win-win for both parties.
- Volunteer board members
- Nonprofits do not pay their board members, which saves money on what would essentially be your C-Suite. For example, your Board President could be a high-level executive who is experienced in leadership development, and your Finance Chair could be a CPA.
IRS registered 501(c)(3) nonprofit organization areas of consideration:
- Cost
- The average cost of creating a nonprofit is in the ballpark of five grand.
- Hiring an attorney, accountant, or other consultants (like Prodigy & Co.) may also be necessary.
- Collaboration
- Nonprofits are inclusive by nature. You will have a board, and you must undertake fundraising efforts, as 10% of the funding for the nonprofit must come from public sources.
- Limitations
- Your board will vote on your ideas, you will request budget approval, as well as marking, programs, recourses for capital, and grant application approval.
- Salaries for members of the nonprofit cannot be “unreasonable compensation,” so there will always be a cap on how much wealth can be earned.
- Tax-exemptions
- You may be liable for taxes on “unrelated business income,” which is defined as: “income from a trade or business, that is not substantially related to the charitable, educational, or other purpose that is the basis of the organization’s exemption.”
- Scrutiny
- A nonprofit is dedicated to the public interest; therefore, its finances are open to public inspection.
- The public may obtain copies of a nonprofit’s state and federal filings.
LLC benefits:
- Liability
- Limited Liability Companies offer, as you can imagine by their name, limited liability protection to its owners.
- LLCs have fewer corporate formalities and greater tax flexibility.
- Flow-through taxation.
- Profits are distributed to the employees, who are taxed on profits at their personal tax level.
- This avoids double taxation.
- Wealth generation.
- LLCs are premier vehicles for holding appreciating assets (real estate, stock portfolios, and intellectual property).
- Room to evolve.
- Once you have the LLC set up, it’s easy to add new partners, sell interest, or change the nature of / products included in your business model.
LLC areas of consideration:
- No tax deduction handout
- 501(c)(3) organizations don’t just have their hand out for help, in return they can handout tax deduction receipts which at least helps to alleviate the tax burden of the donor.
- Help is expensive
- If you want/need employees, you’ll need to establish a business model that supports employees, instead of relying on the help of volunteers – unless your friends and family are generous with their nights and weekends.
The Fine Print
Here’s the fine print.
We are not attorneys or accountants (even though we do cozy up and ask them questions at cocktail parties). There are potential legal and tax requirements that might clearly define how you should structure your entities, so we recommend speaking with an attorney or accountant with nonprofit experience before making any final decisions.
Here’s a finer point:
Whether you want to keep your organization’s wealth inside the nonprofit as to continue programs; or you want to take your wealth outside your company and put it into the pockets of your investors – we want to help you get it done so you can get to impacting.
Let’s put pen to paper and discuss which options best benefit your vision.
There is a particular alchemy involved in your pursuit. We want to help turn your spark into a fire.