Published in The Tennessean January 27, 2014
By Ed Rappuhn – SCORE Nashville
“I’m planning to start a business that could be formed as a for-profit company or a not-for-profit. How do I decide?”
What is your primary aim for this venture? Is it to earn money or promote the public welfare? If it’s overwhelmingly one way or the other, your answer is self-evident. Since you are asking the question, I assume you are not sure which is your overriding goal.
One of our other counselors, Don Bingham, recently had client with the same question and he developed a list of positives and negatives.
The advantages of operating as a not-for-profit include:
Grants might be available through foundations, governments and/or other organizations. Note that I did not say they are available. Receiving grants is based on an unmet need for your product/service and your ability sell the concept and deliver. Obtaining a grant is not a simple procedure.
Tax exemptions are available. These could include income tax, sales tax and property taxes. Donors might be able to deduct some or all of their contributions on their personal tax returns. All tax exemptions are based on your applying for (and maintaining) proper business status. An accountant can provide details of the exemptions for which you qualify.
Discounts and/or free services might be available. For example postal rates can be less, suppliers sometimes offer better prices, and public service announcements in the media might be offered at little or no cost (as opposed to paid advertising).
The disadvantages of operating as a not-for-profit include:
You do not own the business. When the time comes to end your involvement you are not entitled to any of the assets of the business and cannot sell it to another party. Assets can be transferred to another not-for-profit.
You do not have same level of control. Your responsibility to the community, those that fund the business, the Board, and others takes away the freedom you enjoy in a privately held business.
Expansion beyond the original scope of the business can result in the loss of not-for-profit status. If your business model expands, you need to make certain that the new functions remain consistent with your original charter. Also, grants generally specify particular uses and might limit expansion.
Your salary will be limited. Your records are open to public scrutiny and excessive compensation, even within legal limits, will be frowned upon.
Whether for-profit, or not, remember you are running a business. You must have a valuable product or service, keep detailed accounting records and market your business. And don’t forget you don’t have to be a not-for-profit to make contributions to society by providing valuable products and services or donating some of your profits.
Ed Rappuhn is a mentor, workshop facilitator, and the past-chair of SCORE Nashville. SCORE mentors guide entrepreneurs in starting and growing their businesses. Sign up for a free SCORE mentor, find out about our reasonably priced workshops and other services, or volunteer to become a SCORE member at www.scorenashville.org. Email questions about your business to email@example.com and watch for the answers in future columns.