TO BE FOR-PROFIT, OR NOT TO BE, THAT IS THE QUESTION: AN IMPORTANT DECISION FOR HUDSON VALLEY ENTREPRENEURS
People who are both entrepreneurial and philanthropic often struggle with whether their business activity should be for-profit or a charitable nonprofit. In fact, many activities can be either. Schools, theaters, medical providers, art galleries, restaurants, and daycare centers are among activities can be either for-profit or nonprofit depending on how they are formed and operated. So how can one decide?
An initial question is whether the proposed activity is charitable. For centuries, charity included feeding the hungry, healing the sick, relieving poverty, education, and religion. More modern charitable purposes include science, arts, culture, the prevention of cruelty to children or animals, economic and community development, and environmental conservation. If the proposed activity is charitable, there is the option to organize as a charitable nonprofit.
A second question is whether the activity can cover its costs by selling its goods or services (yes, even charities sell goods and services). For example, a theater could have monthly costs of $50,000. If it has 60 seats, and eight shows a month, and sells out every show, it must charge $104.16 a ticket to break even. Will people buy tickets at that price? If not, the theater can form as a charity and try to supplement its earned income with charitable contributions.
There are some reasons people will not want to operate as a charitable nonprofit. First, every nonprofit must be governed by a board of directors of at least three people. Working with committees is very different from simply being a boss. The founder may not want to have to persuade other people to take various actions when running the business.
Also, in New York, employees of nonprofits may only be paid “reasonable compensation for services rendered.” “Reasonable compensation” varies depending on the circumstances, but means that employees can only be paid what comparable employees are paid at comparable nonprofits. The “services rendered” part means there is no distribution of profits or dividends, only the salary. For many, this is a non-starter.
There are many other considerations and also variations that can involve subsidiaries, affiliates, and other mechanisms. Advance planning is highly recommended. Generally, where there is a will, there is a way.
This is not intended to be legal advise. You should contact your attorney to discuss your specific situation.
This article appeared in the July 19, 2022 edition of Chronogram Magazine On Line.