Tips For Running A Successful Midwifery Practice
Tips For Running A Successful Midwifery Practice
When you’re starting a business, it’s likely you’ll hear the phrases “nonprofit” and “not-for-profit” thrown around. It’s also easy to assume these two terms mean the same thing. However, nonprofits and not-for-profits are business structures with different tax implications, governance and functions. Both of these entities contrast with for-profit organizations. Here are the ins and outs of what all these terms mean so you can figure out which structure is right for your new venture.
What is a nonprofit organization?
When you’re starting a business, it’s likely you’ll hear the phrases “nonprofit” and “not-for-profit” thrown around. It’s also easy to assume these two terms mean the same thing. However, nonprofits and not-for-profits are business structures with different tax implications, governance and functions. Both of these entities contrast with for-profit organizations. Here are the ins and outs of what all these terms mean so you can figure out which structure is right for your new venture.
What is a not-for-profit organization?
Similar to a nonprofit, a not-for-profit organization (NFPO) is one that does not earn profit for its owners. All money earned through pursuing business activities or through donations goes right back into running the organization. However, not-for-profits are not required to operate for the benefit of the public good. A not-for-profit can simply serve the goals of its members. A good example is a sports club; the purpose of the club is to exist for its members’ enjoyment. These organizations must apply for tax-exempt status from the IRS, including exemptions from sales tax and property taxes. That also means that money donated by an individual to an NFPO cannot be deducted on that person’s tax return.
Nonprofit vs not-for-profit organizations
There are four key differences between a nonprofit and a not-for-profit:
-
Nonprofits are formed explicitly to benefit the public good; not-for-profits exist to fulfill an owner’s organizational objectives.
-
Nonprofits can have a separate legal entity; not-for-profits cannot have a separate legal entity.
-
Nonprofits run like a business and try to earn a profit, which does not support any single member; not-for-profits are considered “recreational organizations” that do not operate with the business goal of earning revenue.
-
Nonprofits may have employees who are paid, but their paychecks do not come through fundraising; not-for-profits are run by volunteers.
Nonprofits are granted 501(c)(3) status by the IRS. NFPOs are also governed by IRS tax code section 501(c), but depending on their purpose they could fall under a different section, like section 501(c)(7).
What is a for-profit organization?
A for-profit organization is one that operates with the goal of making money. Most businesses are for-profits that serve their customers by selling a product or service. The business owner earns an income from the for-profit and may also pay shareholders and investors from the profits.
Whether you decided to start a for-profit, not-for-profit or nonprofit, the first steps to creating your entity are the same. Start by filing for a business entity in the state in which you wish to run your operations. Your business entity might be a corporation, LLC, sole proprietorship or partnership. All of these entities can operate as for-profit, nonprofit or not-for-profit organizations.
Once the entity has been formed, you will apply for an Employer Identification Number (EIN) with the IRS. It’s during this step that you will select your tax-exempt status using Form 1024 if you wish to run as a nonprofit.Some businesses start as one type of legal entity and later decide to convert to another.
Can you change your legal entity?
Some businesses start as one type of legal entity and later decide to convert to another. This is possible, but it’s a little complicated depending on the types of entities involved.
From nonprofit to for-profit
There are a few reasons why you may wish to change from a nonprofit to a for-profit. Maybe you believe you can get better access loans or other funding by becoming a for-profit. Or maybe you prefer to operate without the regulations that govern nonprofits.
Regardless, once you’ve carefully considered this option and all shareholders are in agreement, you will need to notify the IRS by writing a “statement of nonprofit conversation.”This statement will include:
-
The reason for nonprofit termination;
-
A certified copy of a liquidation plan;
-
The fair market value of the organization;
-
A list of all asset recipients if assets will be distributed.
You will also need to contact your state and local representatives to fill out any forms required in your specific jurisdiction.
Which legal entity is the best?
Ultimately, the legal entity that’s right for your business depends on your goals. As one entrepreneur, Jane Chen, outlined in Harvard Business Review, there are pros and cons to each entity.
“A for-profit can raise money from private investors, for which it must give equity or dividends to shareholders; ultimately, a return on investment is expected,” she wrote. “A nonprofit, on the other hand, can seek donations from individuals, foundations and corporations. Such stakeholders generally expect a ‘social return’ on capital.”
There’s no one-size-fits-all when it comes to establishing a legal entity for your business. And, the good news is you can always change your entity as your business grows. Speak to an expert who can help you choose an entity that optimizes your tax deductions while serving your overarching goal.
