Non-profit organizations are businesses and every business needs a business structure, even if the sole purpose of creating and operating the organization is not to generate profit for shareholders. Deciding on how to structure a non-profit organization is one of the first and most important decisions to make. There are different business structures to choose from. Each one has its own unique advantages and disadvantages to consider. Here are some things to know when it’s time to ask what should my business structure be for a non-profit.
Types of Business Structures
There are four primary types of business structures for non-profit organizations. These include:
An association is an informal group that works toward a common purpose. Some common examples of associations are:
● Parent-teacher associations (PTOs)
● Sports clubs
● Volunteer clubs
Pros of an Association: Associations have their own credibility, especially volunteer-based associations or clubs for parents that have few members. An association can open a bank account and collect dues from members. As long as the group remains small and doesn’t generate income,
Cons of an Association: An association does not offer liability protection. For instance, if a member is hurt participating in an association activity or injures someone else, all club members could be held personally liable for what happened. Any association that engages in risky behavior, such as driving or sports, may want to incorporate to reduce this risk.
A trust is a process to distribute assets to a charity. While there are many different types of trusts, a trust is often used as part of a planned giving.
Pros of a Trust: For estate planning reasons, a trust can provide tax benefits for the estate and beneficiaries. It can reduce estate taxes and enable beneficiaries, whether non-profits or family members, to benefit.
Cons of a Trust: Trusts are held to a fiduciary standard that can increase liability. While trust is a great option for charitable gifts used a planned giving, it offers little protection for members. Trustees do not have liability protection.
A non-profit corporation is a legal business entity that has been incorporated with a different purpose than making money for shareholders. Often, non-profit corporations are charitable, scientific, educational, or religious-focused.
Pros of a Corporation: Corporations are the most common business structure for non-profit organizations. It offers the best level of liability protection and credibility. Plus, the debt accrued by the organization is not the personal responsibility of the organization’s members.
Cons of a Corporation: It costs money to become a corporation with filing fees and the cost to incorporate. Corporations must register with the state and prepare disclosures to the state. While this does require resources and effort, most non-profit organizations find that it is worth the effort.
A non-profit LLC is a limited liability company that has been designated as a not-for-profit for state and federal tax purposes.
Pros of an LLC: LLCs often do not have to have meetings and minutes in the way that a corporation would be required to. It is a more flexible structure.
Cons of an LLC: The IRS will only recognize LLCs as a 501(c)(3) if all of its members are 501(c)(3)s. Additionally, LLCs are created by state law. Each state has its own policies for LLCs.
What Should My Business Structure Be?
For most non-profit organizations, it makes the most sense to choose a corporation as a business structure. It offers the most credibility and liability protection when compared with other business structures. After all, non-profit organizations are businesses, too. However, there are some situations where it is a better idea to choose a different structure based on your goals and needs.
A Note About Sole Proprietorships
Most businesses in the United States are sole proprietorships. According to The Balance Small Business, 73% of businesses in the United States are sole proprietorships. However, by definition, sole proprietorships cannot function as non-profit organizations. Sole proprietorships are pass-through entities owned by a single person to earn money. Since the purpose of a sole proprietorship is to make individual money, it isn’t considered a non-profit organization. Furthermore, non-profits are not owned but operated.
Contact a Chicago Non-Profit Lawyer
If you are unsure of which business structure would be the best for your non-profit organization, it can be helpful to discuss your options with a non-profit lawyer. They can answer any questions that you may have and help you get started with the paperwork. Contact James C. Provenza & Associates, P.C. at (847) 729-3939 or by filling out our online form.