We have all heard things about nonprofit organizations that make them a very enticing option when you are thinking about forming a new business or a new business entity. But what exactly is a nonprofit organization, and is it right for you?
Our Chicago commercial litigation lawyer at Ellis Legal explains more below.
Making Money is Allowed
One common misconception is that a nonprofit organization can't make money or that it can't make a profit. That is false; a nonprofit can and should make money. The difference is not in how much money or profit a nonprofit makes; it's in how the money is used or spent.
In a traditional company, profits of the company are used, in part, to pay the owners, managers, members, or shareholders of the company. But with a nonprofit, that cannot happen.
A nonprofit can use profits for any other reason—for example, to expand the business, to hire new employees, to better its equipment, or simply to put away as a reserve fund or safety net in case hard times should befall the company.
Salaries
There is also a misconception that employees or owners of nonprofit companies can't make a decent salary. That is also false, and in fact, any CEOs of nonprofit organizations make a very good living.
The only difference with a nonprofit is that employee or officer salaries cannot be tied directly to profits (that is, your income can't be more when the company makes more money; salaries must be set independent of what the company may generate at any given time), and of course, employees cannot be paid more than what would be considered fair or reasonable compensation for the services provided to the company.
Remember that in a nonprofit, your accounting must be precise, especially if you intend to take grants. Many grants require that grant money be used only for very specific purposes.
Nonprofit and Non for Profit
You may have heard people use the terms nonprofit and not-for-profit interchangeably. But they actually do have a specific legal difference.
A nonprofit organization fills a need for the general public. Think, for example, of an animal rescue shelter, an organization that provides music lessons to mentally disabled children, or an organization that helps children with cancer fulfill their wishes.
A not-for-profit is, as the name sounds, not in business to make a profit, but generally, it only serves the needs of its members. So, if a bunch of people wanted to start a local club to appreciate and share the love of the ukulele, that would not necessarily serve any overriding purpose to the general public or better society—but it is of interest to its members who started the organization not for money, but for their personal interest in the ukulele.
When it comes to tax benefits, nonprofit organizations usually provide the most benefits when it comes to donations being tax deductible.
Thinking of starting a business or curious about what your business can and cannot legally do? Speak with a Chicago commercial litigation attorney at Ellis Legal at (312) 967-7629 today.