When a potential client comes in to form a company, one of the first questions we have to ask is whether that client wants a nonprofit or a for profit company. Almost always, that entrepreneur is already sold on one or the other, but it is every good attorney’s job to ensure they’re sold on the right one. Most of the time, the decision is fairly obvious. There are many reasons why a for profit company makes more sense than a nonprofit company and vice versa.
What is a For Profit Company
A For Profit Company is what you typically think of when you think “business.” These include Sole Proprietorships, LLCs, Corporations, Partnerships, and all the lesser used business structures. In any of these legal types, profitability is one of the top concerns. In fact, in corporations, the executives and directors have a legal obligation to maximize profits for their shareholders. This same duty is true for all for profit companies.
At their basic structure, for profit companies have owners and managers. The owners decide the managers, and the managers run the company. In most smaller companies, the owners and the managers are the same people. Also, in these types of companies, owners are entitled to a share of the profits, as a reward for their investment. Different companies structure this share differently and there are several different tax treatments.
What is a Nonprofit Company
Nonprofit companies are companies set up for purposes other than to make a profit for its owners, directors, management, or members. As the North Carolina General Statutes define them, “Nonprofit corporation” means a corporation intended to have no income or intended to have income none of which is distributable to its members, directors, or officers, except as permitted by Article 13 of this Chapter, and includes all associations without capital stock formed under Subchapter V of Chapter 54 of the General Statutes or under any act or acts replaced thereby.
The definition of nonprofit can be misleading. Employees, directors, and management can receive a salary or income based on the work they do. However, no person may receive distributions as a result of any type of ownership or control. The difference may seem like splitting hairs, but from a tax perspective, these differences make a lot of sense. Salaries and income are subject to the FICA taxes. Equity for owning a company is not subject to those same taxes.
A for profit company and a nonprofit company are subject to different sets of laws. Nonprofits have stricter duties owed to the public. They also have different tax filings and reporting requirements. Additionally, for profit companies handle disputes privately through the court system whereas nonprofits can also be subject to the Attorney General’s authority.
You cannot sell nonprofit companies because you cannot own nonprofit companies. This is a major difference between the two. If building a company and selling it are vital to your plans, a for profit company is in your future.
Nonprofit companies do not pay a company income tax. Corporations have a company level tax whereas LLCs have pass through taxation. Both of these for profit tax types happen every year there is a profit. With certain restrictions, nonprofits can earn and hold onto money without worrying about taxes on that money.
In conclusion, it is important to know the difference between these types of entities. Sometimes, this choice is clear. Other times, you have options. Increasingly, entrepreneurs are choosing to be for profit companies while still upholding a social benefit. In other circumstances, entrepreneurs are electing nonprofit status to capture some of the nonprofit benefits.