Dear Consultant,
For the last several years, my wife and I have been helping a youths in our neighbourhood sell their artwork through local business-owner’s stores and through an online portal. We’re established enough now that we’re looking at creating a formal business out of this. We see the opportunity to make money for ourselves while at the same time helping the young artists in our city. What are the advantages of registering as a non-profit versus a for-profit organization? We’re obviously not in this just for the profit, but we’d like to earn some money to cover our expenses and maybe even pay ourselves a bit too!
Contrary to what many entrepreneurs think, starting a non-profit does not necessarily mean that you’ll forego a salary and do hard work only out of the goodness of your heart. Non-profits can be operated as a business, earning money to cover their expenses from the sale of their products or services just like a for-profit organization. That means that you can not only cover your expenses, but you can also pay yourself a salary as you see fit.
Non-profits aren’t charged as much taxes as for-profits, but are expected to provide some type of product or service of a charitable, scientific, religious or public safety nature.
The key difference between a non-profit and a for-profit organization is that non-profits aren’t charged as much taxes as for-profits, but are expected to provide some type of product or service of a charitable, scientific, religious or public safety nature. Also, non-profits are supposed to stick with activities related to their basic purpose; if they deviate or “pivot” away from their core tasks, they may be required to pay tax on their income after expenses are subtracted, just like a for-profit business.
One common misconception is that as a non-profit organization, you cannot “make a profit.”
One common misconception is that as a non-profit organization, you cannot “make a profit.” That is, you can’t earn too much money above and beyond your expenses. This isn’t really true, you can make net income, but you can’t simply put that money into your pocket. That profit needs to be reinvested into the organization. So the profit can go towards more marketing, or hiring a new employee, etc.
The other thing to think about is whether you’d like to receive donations as well as earning money from your product or service. If that is the case, you may want to become a Nonprofit Corporation. In many jurisdictions, Nonprofit Corporations can issue tax receipts to donors allowing them to get tax benefits for the money that they give you. Incorporating is a different organizational form from simply registering a business as non-profit or as 501(c). In the USA, these are known as “Nonprofit Corporations” and in Canada these are known as “Registered Charities.”
… at the end of the day, registering as a non-profit may be a valuable way for you maintain the trust of your stakeholders.
Registering your business as a non-profit often makes people more apt to help you out. If they believe that you’re in it for the profit, then you may lose some social capital with those who question your motives. You’ve said that you’re not strictly in it for the profit, and you’re dependant on the trust of local businesses and neighbourhood youths for the products that you sell, so at the end of the day, registering as a non-profit may be a valuable way for you maintain the trust of your stakeholders.