7 Pros and Cons of Running a Non-profit Business
Are you wondering if running a non-profit business is worth it?
The quick answer is yes.
But running them isn’t so simple.
Statistics show rising operating expenses are the biggest challenge for 43.37% of non-profits in the U.S. For 23.03% of them, the biggest challenge is the lack of adequate finances.
Access to more funding can solve both challenges and incorporating your non-profit business can make it easier to access more finances.
This is not the only advantage. Setting up a non-profit business comes with plenty of benefits, but it carries some challenges as well.
The good news is that there’s a way to leverage the advantages and mitigate the challenges.
Curious to learn more? Let’s get to it.
5 Pros of Running a Non-profit Business
There are several reasons why setting up a non-profit business is a great idea.
1. Tax Exemption
Non-profits are exempt from paying corporate income tax at the federal level.
However, it doesn’t happen by default. The organization must make an application with the IRS.
According to section 501(c)(3) of the Internal Revenue Code, an organization can only be eligible for tax-exempt status if it falls under one of these categories:
- Charitable organizations created for religious, literary, educational, scientific, and other charitable purposes
- Church and religious organizations
- Private foundations
- Social welfare organizations
- Civic leagues
- Social clubs
- Labor organizations
- Business leagues
To remain eligible, profits from the organization shouldn’t directly benefit any individual. In addition, these organizations shouldn’t participate or intervene in political campaigns on behalf of a candidate.
Once your non-profit organization qualifies for the 501(c)(3) tax-exempt status tax, any charitable contributions made to the organization by an individual or company are tax-deductible.
2. Eligibility for Grants and Funding
Governments, foundations, and corporations allot financial resources to contribute toward socially impactful initiatives. Some of these organizations limit these resources to nonprofit corporations only.
Being incorporated as a non-profit business makes you eligible for such grants, donations, and funding.
In addition, getting 501(c)(3) tax exemption status means the contributions made by these organizations and individuals are tax-deductible. It makes your non-profit a more attractive recipient of donations.
This easy access to funding can help you implement your programs and achieve your non-profit’s mission. Unlike a bank loan, you don’t have to worry about repayments too.
3. Fundraising is Easier
As a non-profit organization, having the public’s trust is essential to holding successful fundraisers.
The public views an incorporated non-profit business as more credible and trustworthy for two main reasons:
- The government regulates them
- They have a commitment to remain transparent to their stakeholders, donors, and beneficiaries
This trust generates more financial support and encourages fruitful collaborations.
4. Limited Liability
Even non-profit organizations can run into financial troubles, such as defaulting on loan repayments. In case your charitable venture runs into such troubles, the last thing you’d want is to lose your personal assets.
A major advantage of forming an incorporated non-profit business is that it protects its directors and members from the legal liabilities of the non-profit.
This means your personal assets aren’t attached to recover the organization’s debts and liabilities.
However, lawsuits stemming from the irresponsibility of any of the directors can nullify the limited liability protection.
5. Perpetual Existence
Incorporating your non-profit business means it’s a separate entity from its owners. In case of the exit, retirement, or death of founders, the non-profit continues to exist.
This means all the hard work you’ve put into establishing the reputation and trust of the non-profit business will not fizzle out with your exit. You simply need to pass over your ownership or responsibilities to a successor, and the organization will continue to fulfill its mission.
Attaining this perpetual existence gives you the confidence to establish long-term programs. It also creates room for long-term collaborations to exist.
Cons of Running a Non-profit Business
Despite these advantages, running a non-profit business has its cons.
1. Demanding Formation Process
Creating a non-profit business requires time and finances.
To incorporate your non-profit, you need to file the Articles of Incorporation with your state. Each state charges a filing fee. Alabama, for instance, charges $237 while Ohio charges $99. You’ll need to do your research to find out the requirements of your state.
In addition, you’re required to maintain detailed and up-to-date records of things like:
- Financial records
- Bylaws
- Charitable registration permits
This may sound like a large investment of your time and money. However, you don’t have to handle the paperwork yourself.
A business formation service like Incfile can take on the task of incorporating your non-profit business. Learn more about this service from this Incfile review by GovDocFiling.
2. Subject to Regulations
A non-profit business is subject to laws and regulations.
For instance, you’re required to make annual filings with the relevant state government. The IRS also expects tax-exempt organizations to file Form 990 every year.
The good news is that business formation services like Incfile send email reminders for the due dates of these filings.
Non-profit businesses are also required to maintain transparency with the public. Annual reports and vital business records should be available to anyone who wants to see them.
The purpose of this law is to keep the directors of the non-profit business accountable for the funds and grants they receive.
Set Up Your Non-profit Business
The pros of running a non-profit business outweigh the cons.
Incorporating your non-profit:
- Increases your chances of securing grants and holding successful fundraisers.
- Protects your personal assets from the organization’s liabilities.
- Ensures that the non-profit will continue existing after your retirement.
Our advice: Use a business formation service to file the paperwork with your state and file for tax exemption with the IRS. Outsource where you have to. While this might seem to inflate running costs, in some cases, it’s definitely worth it to have a more efficient non-profit. For example, use a service like Ascendant Technologies that offers specialized IT services for non-profits. This means that you don’t have to worry about your IT systems getting outdated and you can focus your time and resources where it matters most.
All you have to do is worry about running your non-profit.
Author Bio:
Brett Shapiro is a co-owner of GovDocFiling. He had an entrepreneurial spirit since he was young. He started GovDocFiling, a simple resource center that takes care of the mundane, yet critical, formation documentation for any new business entity.