Other possibilities to consider

Below you’ll find a few other options to consider when brainstorming ideas for your new business.

Both of these options can be implemented as add-ons to an existing business model, e.g. “How can I take my current business idea and make it eligible for non-profit status?”

Or they can form the foundation upon which you map out your other business ideas, e.g. “I know I want to build a family business, so what niches and business models can we all agree on?”

Non-Profit 501(c)(3) Organization

The terms non-profit, not-for-profit, and tax-exempt refer to a specific type of corporate entity recognized under Internal Revenue Code 501(c)(3) as a charitable entity that exists primarily to provide a service to the community, in contrast to a regular “for-profit” business, which exists to make profits for its shareholders. Non-profit entities enjoy tax-exempt status, meaning that the organization itself does not have to pay tax on its income. Any employees, including board members, who receive a paycheck from the organization, are still required to pay income tax on their earnings just like anyone else.

Many people think the term “non-profit” means that the organization is required to operate at a loss. However, the business still has to make a profit in order to fulfill the mission of the organization. The business is only sustainable if its income is higher than its expenses. In this case, the only difference between a non-profit organization and a for-profit business is in the utilization of the extra revenues generated. In a non-profit organization, the excess funds are used toward fulfilling the organization’s mission and charitable cause, while in a for-profit business, the profits are shared among the owners or shareholders.

It is interesting to note that the daily operations of small non-profit and for-profit organizations function along similar lines that are strikingly different from the bigger versions of the same genre. There’s really not much of a difference between running a small non-profit organization as opposed to the same size “for-profit” business. The main differences lie in the terminology used for customers vs. donors, sales vs. donations, and the tax forms that are used to report income and expenses.

However, there are some major differences between non-profit organizations and for-profit businesses when it comes to the initial setup and strategic planning. While for-profits focus on profit-making activities, the non-profit tends to focus on matters of board development, fund mobilization and volunteer management. The entity formation process for a non-profit is also far more extensive and stringent than forming a regular LLC or Corporate entity.

For example, a new organization filing for non-profit status must provide financial projections as well as detailed background information on its ownership, board of directors, donors, vendors, and more, whereas a for-profit entity is not required to provide any such information. It often takes several years to secure 501(c)(3) status, and the application process is rarely undertaken by a non-professional.

If you decide that you would like to pursue 501(c)(3) status, it is advised that you retain a business lawyer or CPA knowledgeable in the process. Filing any document improperly, answering any question improperly, or providing inaccurate financial projections can render your application denied and you will need to start over. Not to mention, you lose the non-refundable $400 application fee which you will have to pay again should you choose to file a revised application.

Likewise, if you plan to apply for grants to fund your non-profit, it is advised that you retain the services of a professional grant writer. According to Elana Edelstein, Glendale College’s Assistant Director of Communications, Marketing and Foundation, “About 90% of applicants are rejected just for not following the required guidelines.” While applying for grants, most non-profit organizations fail to follow the prescribed guidelines, resulting in the rejection of their applications.

Even with all these caveats, operating a non-profit organization can be a richly rewarding experience for the entrepreneur whose heart yearns to make a difference in the lives of others. If you’re the type of person who donates a lot of time or money to charity as it is, it may be well worth the time and effort to work towards sculpting your business idea into something that lends itself to non-profit status.

Excerpted from:

Starting A Business 1-2-3
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Module 1: Research and Development