Converting Non Profit to For Profit
Converting a nonprofit to a for-profit organization changes how the company is run and its legal responsibilities.3 min read
Updated July 10, 2020:
Converting a nonprofit to a for-profit organization changes how the company is run and its legal responsibilities. Nonprofit organizations are considered public entities. The managers of a nonprofit don't have any ownership interest. Because it isn't owned by individuals, a nonprofit can't simply transform into a for-profit company.
When a nonprofit organization is created, the founders are required to file documents that detail its activities and state that the organization won't be earning money for a specific individual. They must also agree that when the organization is dissolved, the assets will be given to another nonprofit organization. One of the biggest benefits of electing nonprofit status is that the organization is tax-exempt and can accept grants and donations.
Reasons to Become For-Profit
It takes lots of paperwork to earn tax-exempt status, which is very valuable and saves the organization lots of money. For that reason alone, many people wonder why a nonprofit organization would ever want to become for-profit. However, there are numerous reasons why an organization would give up its nonprofit status, including:
- It can help the organization get loans and other funding to provide more services.
- Some causes are better served by a for-profit organization.
- More capital is needed that can be gained from public loans and grants, and the organization wants to reach out to potential investors.
- It can free an organization from the regulations that come with nonprofit status.
Changes in Health Care
The move from nonprofit to for-profit is happening more frequently in the health care industry, where many hospitals and clinics are becoming private, for-profit organizations. Instead of following the traditional nonprofit model, these new types of companies follow the model of a corporation.
Changing to for-profit status doesn't impact the revenue streams of these health care organizations because they get funding from Medicare, Medicaid, insurance reimbursements, and payments from patients. Many investors are eager to support for-profit health care organizations and believe the companies should make a profit because they help the sick.
This trend in the health care field is also brought on by difficulties of operating as a nonprofit. Economic troubles have made it difficult for many nonprofits to obtain the funding they need in order to operate. People aren't giving as much to charities, and grants are offered less frequently and are becoming more competitive. Many nonprofits used to be able to count on grants to cover most of their operating costs, but that is no longer the case.
Under nonprofit 501(c)3 status, every board member has equal voting power. This is to ensure that the founder or executive director can't make decisions on their own and that the organization must follow the wishes of the people who are contributing the funds.
Donations to nonprofits are tax-deductible. Those tax deductions mean the government isn't receiving money it would have otherwise, so the government assumes ownership of every nonprofit's assets.
With that in mind, a nonprofit's board members are considered representatives who are supposed to act according to the will of the government. The problem is that doing what is best for the government isn't always in line with doing what is best for the nonprofit and its cause.
A common practice for nonprofits is to combine services with business activities, such as an employee development center running a restaurant as a job training site, or a women's shelter selling items made by its residents. These activities can occasionally fall under the nonprofit umbrella, but in most cases the organizations form a separate for-profit entity for the business activity. The revenue from the for-profit arm is donated back to the nonprofit in a practice known as wholly owned for-profit subsidiaries.
Creating for-profit subsidiaries allows organizations to leverage their existing goods and experience in order to earn funds for their organization. Because earnings from subsidiaries are often related to the nonprofit's mission, they are often considered related income and are not taxed.
Adding a subsidiary or changing tax-exempt status can be a long process. It is best to talk to an experienced lawyer and accountant to understand the long-term effects of electing either status.
If you need help with converting nonprofit to for-profit, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.