SHOULD MY NEW VENTURE BE ORGANIZED AS A NONPROFIT?

November 14, 2012

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That’s a question that clients who wish to start endeavors in fields like education, healthcare and even software development quite often ask.  The answer, of course, is, “That depends.”  There are numerous successful examples of both types. 

I generally respond by trying to outline the differences between the two and the implications these may have for the particular client.  You can own a for-profit business in whole or in part, but no one owns a nonprofit.  It is a public trust.  In a nonprofit, final responsibility for the public trust and ultimate authority for its affairs rest with a governing board (usually a board a directors, but sometimes a board of trustees).  The board has the authority to hire and fire all employees.  The founder, if s/he becomes the CEO (usually called the Executive Director) will be an employee and serves at the board’s pleasure.

A nonprofit is permitted to take in more money than it spends – this is called earning a surplus rather than making a profit.  However, that surplus cannot inure to anyone’s personal benefit.  It can’t be paid out as dividends, for example.  It must be used to help the organization grow or to save for a rainy day.  A nonprofit is also permitted to pay reasonable compensation to its employees, including the CEO, though both the commonwealth and the IRS may take a dim view if they consider that compensation excessive as measured by that of individuals in similar positions in similar organizations.

If a nonprofit is sold, the proceeds must go either to another nonprofit or in some instances to the state instead.  If its assets are sold, the proceeds must go to the nonprofit and not any individual.  I had a client who had for many years operated as a nonprofit a technical training program used mainly by corporate clients.  It also published books on the subjects he taught.  He was ready to retire and wished to sell the business only to discover that there was no way he could do so under the circumstances that would allow him to enjoy the proceeds of the sale personally.  He couldn’t even sell the inventory of books and keep the money for himself.

One of the most distinctive features of nonprofit entities is that they pay no taxes – no state or federal income taxes, no sales and use taxes and no real estate taxes on property that may own, insofar as the property is used for their nonprofit purpose.  However, a nonprofit’s employees must pay taxes on their salaries and wages like all employees and the nonprofits are subject to the same payroll taxes, like Social Security, as other employers.
Most nonprofits are organized to meet the requirements of section 501(c)(3) of the Internal Revenue Code as being organized for scientific, educational or charitable purposes and as such are often referred to as 501(c)(3)’s.  In order to be so classified the organization must obtain a determination from the Internal Revenue Service by filing a Form 1023 and providing all of the information and documentation it requires.  Once the IRS has issued a positive determination, individuals making donations to the organization may claim the donation as a charitable deduction on their personal income tax returns.  Not all nonprofits qualify; I can’t, for example, deduct a contribution I make to a country club or a political party.

Unlike for-profit businesses, 501(c)(3)’s are also eligible to receive grants from foundations and certain government agencies, although these are generally very difficult to obtain and are highly competitive.  On the other hand, they are generally ineligible to receive government contracts that come available under a small business set-aside.

While 501(c)(3)’s don’t pay taxes they are nonetheless required by law to file an annual report with the IRS, called a Form 990.  These look rather like tax returns, but also contain considerable information about operations, like the names of all board members.  The compensation paid to officers and directors must be disclosed, as must the salaries of highly paid employees and contractors.  These returns are a matter of public record and are easily viewed by anyone via web sites such as Guidestar.org.  So, unlike the owner of a small for-profit business, the CEO of a nonprofit’s compensation is a matter of public record that virtually anyone in the world can access.

Is nonprofit or for-profit best for you?  Well, it depends.  Is the ability to receive tax deductable donations important, or would it be better to be able to raise venture capital for rapid growth by selling equity?  Is the aura of being a “do-good” organization, like SCORE, important to you?  Will being exempt from taxes help your mission?  Does having so much of your affairs a matter of public record make you uncomfortable?  Only you can weigh these factors and decide.  A SCORE mentor may be able to help you sort them out.

GATEGORY: Non Profit, Uncategorized

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Pricing for Profit

June 4, 2012

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Courses in marketing often start by presenting the five P’s.

  • Product (or service)
  • Price
  • Place
  • Positioning
  • Promotion

 

Most people think only of, “promotion,” as being, “marketing,” but all five P’s are important.  If we don’t have a good product or service people will soon know.  If we’re not in the right place, we won’t find customers.  We must position our business with the respect to the competition and the customers and we do have to promote our business.  In this post, however I’ll focus on the role of price, something not everyone thinks of as part of marketing, and which doesn’t always behave in the way we first learned in school. (more…)

GATEGORY: sales

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Inventory…the hidden Devil

June 3, 2012

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Many new retailers believe that markup is the only way to make a profit in the retail business. More markup, more profit. The more inventory they have on hand to push retail sales, the easier it is to have a profitable business.

That concept sounds good, but it is wrong. The inventory turnover is a more important figure for management to look at to evaluate the progress and possible profitability of the business. This is particularly relevant for a new business. It is all about dollars. Most new businesses do not have a large bank account to finance large inventories. They need to take their limited dollars and make them work harder. If they have $50,000 of retail inventory, $100,000 in sales means that they turn their inventory over 2 times. The $50,000 has worked at a low level. If they turn their inventory over 3 times, it produces $150,000 that translates into a 3 time turn. (more…)

GATEGORY: Retailing

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