Hi! Thanks for a very interesting question.
I will provide here snippets from the articles I will cite but I
highly recommend that you read them in their entirety to get a better
coverage of the concepts.
In terms of regulations one must address the following issues first
before coming up with a decision. I identified these three issues but
within these issues are other considerations you must know and
identify.
1. What is your personal objective in setting-up the business whether
for profit or non-profit?
2. What type of business will you be setting up? What will be its
activities?
3. Will you be willing to walk the extra mile in setting-up that
non-profit organization?
4. Will you be operating online?
Let us discuss each issue.
1. What is your personal objective in setting-up the business whether
for profit or non-profit?
Our first consideration is the most basic element part of the
question. Do you intend to make lots of money from this business? Or
are you setting it up to help your fellowmen?
Answer: If your answer is YES you want to make lots of money a “for
profit” business would be the one for you. Don’t get me wrong some
people get good salaries in non-profit organizations but if your
personal goal is purely for monetary considerations an ordinary
proprietorship, partnership or corporation will do just fine.
Furthermore non-profit organizations also accumulate and need profits
to sustain the operations but these profits must be channeled back to
the operations and cannot be used to benefit the owners or board
members.
Our first link will provide the rationale for our answers in questions
#1 and #2.
“For-profit organizations function under the ‘private inurement
doctrine’.”
A “This doctrine arises because for-profit organizations have owners,
namely private stockholders. Profits earned by a for-profit
organization ultimately are passed through, or inured, to the
stockholders, usually by dividends on shares of stock.”
B “Non- profit organizations are not permitted to function using the
private inurement doctrine. The owners or administrators of a
non-profit organization do not receive any portion of the
organization's profits, as is specified in the Articles of
Incorporation.”
C “Any profits earned must inure back to a non-profit activity
sponsored by the organization itself or must be donated to other
non-profit organizations. By not permitting non-profit organizations
to distribute their profits according to the private inurement
doctrine, it is thought that non- profit organizations will observe
their pledges to serve the public interests and provide charity to the
surrounding community.”
So in this regard if you want to acquire monetary wealth then a
“non-profit” organization will NOT be suitable for you.
---------------------
2. What type of business will you be setting up? What will be its
activities?
Let us say you want to help a great number of people and think that a
non-profit organization will be the way to go which would be a very
wise choice.
Aside from your objective of helping people another concern will be
paying taxes. Since non-profit entities must save money to continue
their humanitarian operations, government usually give them tax
exemptions but not al non-profits have this privilege.
“Another difference between for-profit organizations and non-profit
organizations concerns tax-exempt status. Generally, tax-exempt status
is not conferred to for-profit organizations and similarly, not all
non-profit organizations are tax exempt. Tax- exempt organizations are
a subset of non-profit organizations. For a non-profit organization to
attain tax-exempt status, it must have the following three
characteristics. First, the organization's Articles of Incorporation
must outline tax exempt activities at the time the corporation is
started. A pre-existing corporation will not be permitted to attain
tax-exempt status, even if the activities that they are performing
would be considered charitable, unless its Articles of Incorporation
are amended or modified to include tax exempt activities.”
“Second, a ‘substantial’ portion of a non-profit organization must
consist of tax exempt activities or a substantial portion of the
corporation's money must go towards tax exempt activities. Attaining
tax-exempt status does not mean that the non-profit organization
cannot turn a profit. It does mean, however, that the profits are used
only for tax exempt activities and are not distributed among
shareholders.”
Aside from the above quotes in questions #1 and #2 our first link also
provides a historical analysis of the tax exemptions given to
non-profit organizations.
“FOR-PROFIT AND NON-PROFIT ORGANIZATIONS: IS IT TIME TO START TAXING
"LIKE" ENTITIES ALIKE?”
http://www.nonprofitexpert.com/non_profit_versus_for_profit.htm
The next link meanwhile provides in table format the type of
organizations that are tax-exempted. In case the business idea you
have falls within these categories it MIGHT be wise to go for a
non-profit organization.
“Tax-Exempt Organization Reference Chart
http://www.paperglyphs.com/nporegulation/documents/exempt_orgs.html
--------------------
3. Will you be willing to walk the extra mile in setting-up that
non-profit organization?
Setting-up a regulated ordinary business is tough enough; a non-profit
organization is even more difficult. This is the consensus among
experts in this field! This is the reason I said that even if your
idea falls among the tax-exempted categories it is just a “MIGHT” that
a non-profit entity should be the way to go since stuff such as paper
work and more regulations to follow makes a non-profit life a not so
easy one.
This next resource shows the difference between ordinary business and
non-profit regulations and laws.
Laws:
Business – “Must conform to wide range of rules related to labor,
environment, health and safety, etc. Free to enter new business areas
if owners choose to.”
Non-Profit – “Must conform to same rules as business, plus special
rules for non-profit 'exempt' organizations. In addition, it is
generally restricted to activities that are consistent with its
"exempt purpose". Today non-profit organizations are subject to more
government regulation than most businesses regarding what they can do,
how they can do it, and what information they must provide to the
public.”
Taxation:
Business – “Pays FICA, Workmen's compensation, state unemployment
insurance (SUI), and withholding taxes for all employees; pays
property taxes and sales taxes on purchases not resold; pays federal
income taxes if it's a "regular" corporation, but not if it's a
partnership, "subchapter S" corporation, or proprietorship; may also
pay state income taxes.”
Non- Profit – “Same as partnership or "subchapter S" corporation,
except may have state exemption from state or local property, sales,
or income tax. Tax exempt status for non-profit organizations does not
mean they pay no taxes; it means only that they are exempt from
Federal income taxes.”
However non-profits have a plus aside from tax exemptions. They are
eligible to receive government grants and they have volunteers who
usually work for free or for very little money.
“How alike are nonprofits and for-profit businesses?”
http://www.nonprofits.org/npofaq/18/82.html
An example comparison on a state level is discussed in this website
for the state of Washington. It also mentions more elements as regards
to the regulatory advantages and responsibilities of non-profit
organizations.
“Advantages and Disadvantages”
http://members.aol.com/irsform1023/addis/
These next links provide a variety of discussions and articles as
regards to the regulatory frameworks of ordinary businesses and
non-profit entities.
Business:
a. “Laws and Regulations Regarding Your Business”
http://www.managementhelp.org/strt_org/strt_bus/strt_bus.htm#anchor650419
b. Business Start-Up Advisor
http://www.business.gov/busadv/frame.cfm?urltest=http://www.businesslaw.gov&catid=21&urlplace=maincat.cfm
Non Profit
a. “Nonprofit-Specific Legal Information”
http://www.managementhelp.org/legal/np_genrl/np_genrl.htm
b. “Federal Laws”
http://www.nonprofits.org/npofaq/keywords/3e.html
c. “State Laws”
http://www.nonprofits.org/npofaq/keywords/3k.html
d. “State Regulations”
http://www.nonprofits.org/npofaq/keywords/3l.html
-------------------------
4. Will you be operating online?
The Internet has been great for businesses as evidenced by e-commerce
entities such as Amazon and Ebay. But for non-profit organizations
there is a tricky part. Yes there are non-profit organizations
soliciting funds online but in order to set it up there are some
nuisances. This article from About.com mentions that you might have to
do more paper work to operate online.
“Here are the basics. The Internet is unique in that a Web site is
available to be viewed not only across the US but across the world.
While this access is extraordinary and inexpensive, it also makes your
organization subject to many jurisdictions that regulate fundraising
activity.”
“Registration is required in at least 40 states and, in an attempt to
facilitate an easier method to comply, a Uniform Registration Form
exists that can be used in at least 38 states. Even so, some of those
states require an extra paragraph of information or supplemental
documentation that keeps registration requirements a time-consuming
task. As there are fees required for registration, compliance can also
be costly.”
“Online Fundraising - A Dangerous Proposition”
http://nonprofit.about.com/library/weekly/aa040703.htm
If you need to operate online you will need this document to help you
register in different states much faster according to previous
article.
“The Unified Registration Statement”
http://www.nonprofits.org/library/gov/urs/
Search terms used:
Non-profit “for profit” basics corporations regulations laws choosing
I hope these links would help you in your research. Before rating this
answer, please ask for a clarification if you have a question or if
you would need further information.
Thanks for visiting us.
Regards,
Easterangel-ga
Google Answers Researcher |
