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Sample #2:

Question:

I own a childcare center in Houston, Texas. I am a for-profit business with an LLC structure. I have been asked numerous times “why isn’t the business a non-profit?” 1) What are the tax and other business related benefits of being a non-profit in the childcare industry? I have XX employees with XX students. 2) I have the business property formed under an LP — and technically the LLC pays rent to the LP. What advantages and disadvantages should I think through. 3) What steps would I need to take to change the LLC to a Non-profit? And what would the wait period be to satisfy the change? Thank-you!

Answer:

You have probably been asked why your childcare center is not structured as a nonprofit because of people’s perceptions that nonprofits are founded and operated in the public interest, which tends to make them more willing to offer money or time or do business with a nonprofit. While a nonprofit business does have some structural advantages over a for-profit operation, whether the nonprofit structure is appropriate and beneficial for your particular business will depend on all the facts and circumstances. For example, if you want or need to take profits from the business in order to meet your personal living expenses, then the nonprofit structure probably isn’t appropriate. Also, converting from a for-profit business to a nonprofit business would require you to formally reorganize your business.  This process, which will likely require input from your legal and tax advisors to thoroughly evaluate all of the considerations, will require you to form a new nonprofit entity (usually a corporation), transfer the for-profit LLC’s assets to the new nonprofit entity and then dissolve the for-profit LLC.  However, before transferring assets to the new nonprofit entity and dissolving your for-profit LLC, you will typically need you to pay off the LLC’s debts and obligations, which may be an issue based on your recent acquisition of the business.

As to the benefits of structuring your business as a nonprofit, while some of the information is state specific, you can review discussions on the advantages and disadvantages of the nonprofit structure and non-profit/for-profit comparisons at the following websites:

http://www.scoreknox.org/Non%20Profit%20pdf/NP%2001.pdf

http://www.scoreknox.org/library_rev.htm (see Non-Profit Index)

http://www.self-help.org/business-and-nonprofit-loans/business-and-nonprofit-files/business-nonprofit-technical-assistance-resources/Nonprofit.vs.ForProfit.Childcare.Facilities.doc

http://www.associatedcontent.com/article/571747/forprofit_versus_nonprofit_childcare.html?cat=25

http://justcauseit.com/blogs/skyekilaen/nonprofit-or-not-really

http://learningtogive.org/papers/paper177.html

Forming a nonprofit organization exempt from tax under federal and state law can be a difficult, lengthily, and somewhat costly process, which generally requires the input of legal and tax advisors. Structuring a nonprofit involves three basic factors – the nonprofit purpose, the business entity, and the management organization. Forming a nonprofit business first involves the determination that your planned activities will qualify for an IRS nonprofit exemption. You then form a business entity (typically a corporation) in your state and file for nonprofit exemption with the IRS. Once you receive your nonprofit exemption from the IRS, you may also need to apply for a nonprofit exemption with the state. The following are additional comments and helpful information that you can use to form and structure a nonprofit should you decide to reorganize your business:

1. Nonprofit purpose, exemption and operations. Nonprofit corporations exist not to make money, but to fulfill one of the purposes recognized by federal law: religious, charitable, educational, scientific or literary. The primary advantages of a nonprofit organization are that it does not pay income taxes and can, under certain circumstances, more readily access or qualify for federal loans and public and private grants. The main disadvantages are that it cannot be used to generate profits for the owners; the business purpose must conform to IRS regulations, and the administrative burden of maintaining nonprofit exemption status. While you can take a salary as an employee of the nonprofit, you cannot take profits from a nonprofit organization in the way that you can from a for-profit business. You can review additional discussions of nonprofit organizations at the following websites:

http://foundationcenter.org/getstarted/faqs/html/np_pro_con.html

http://nonprofit.about.com/od/nonprofitbasics/bb/corppros.htm

http://www.legalzoom.com/nonprofits-guide/non-profit-defined.html

http://www.abanet.org/buslaw/newsletter/0036/materials/book.pdf

Whether your planned activities will qualify for an IRS nonprofit exemption will depend on all of the facts and circumstances. To better understand the IRS tax-exempt status qualifications and filing requirements, you can review the following IRS websites:

http://www.irs.gov/pub/irs-pdf/p557.pdf

http://www.irs.gov/charities/index.html

Form 1023 is used to request tax-exempt status from the IRS. Form 1023 and instructions and related information can be found at the following websites:

http://www.irs.gov/pub/irs-pdf/f1023.pdf

http://www.irs.gov/pub/irs-pdf/i1023.pdf

http://www.irs.gov/charities/article/0,,id=130101,00.html

Additional information on forming a nonprofit and nonprofit operations can be obtained from the following websites:

http://foundationcenter.org/getstarted/faqs/html/starting_nonprofit.html

http://www.nolo.com/legal-encyclopedia/article-29948.html

http://nonprofit.about.com/od/nonprofitbasics/fr/startreview.htm

Publication:

http://www.nolo.com/products/how-to-form-a-nonprofit-corporation-NNP.html

2. Nonprofit formation.  Nonprofits can be organized under various entity structures; however, the C corporation structure is often used because it meets the personal asset protection criteria and offers an efficient governance and management structure. The specific forms and filings vary by business entity; but, the basic steps to forming a corporation are reserving a business name and filing Articles of Incorporation and other appropriate forms with the State. Also, you have founder meeting minutes, director meeting minutes, bylaws, federal and state tax identification numbers, and other business entity governance issues. Generally, the least expensive method of forming a corporation or other business entity is preparing and filing the paperwork yourself. However, we normally recommend that first time filers form a business entity through a lawyer or with incorporation services like those offered by our affiliate through our website in the Helpful Links section. Also, you can review state filing information and forms at the following websites:

http://www.sos.state.tx.us/corp/nonprofit_org.shtml

http://www.sos.state.tx.us/corp/forms_option.shtml

The Texas Non-Profit Corporations Act can be found through the SOS website:

http://www.sos.state.tx.us/corp/index.shtml

IRS:

http://www.irs.gov/businesses/small/article/0,,id=97860,00.html

3. Bylaws.  For drafting and review with your lawyer, you can find sample nonprofit bylaws at the following websites:

http://www.lectlaw.com/forms/f162.htm

http://users.aristotle.net/~nonprofit/startup/bylaws.htm

http://foundationcenter.org/getstarted/faqs/html/samplebylaws.html

4. Minutes.  In addition to Articles of Incorporation and Bylaws, corporations should have, at a minimum, minutes to document founder organizational meetings, Board of Director elections, officer elections, bank account authorization, and other decisions regarding major contracts and important business issues.

5. Professional assistance. Forming a nonprofit can be a difficult process. If you need to analyze the personal and business tax implications of a nonprofit we recommend that you consult with a local lawyer and tax advisor. If you do not have a tax advisor, we have had good feedback on Padgett Business Services, which has franchisees around the country.

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