Whether or not you can convert a for-profit business into a nonprofit one is a complicated question. The short answer is yes. However, you have to do this properly.
First off, there’s a huge difference between a for-profit business and a nonprofit one. For-profit businesses are owned, but
Let’s discuss the different methods and red flags associated with this process.
Sell to the Nonprofit
In my opinion, the cleanest and simplest way to convert a for-profit business into a nonprofit is to sell the for-profit business assets to the nonprofit. This one is best because it leaves you with one entity at the end that is brand new. This will make your books and records much cleaner. And, you don’t have to worry about constant conflicts of interest.
To complete this version, you need to establish a new nonprofit, with its own board of directors. These directors should be unrelated to the for-profit business. However, the mission of the nonprofit should be perfectly in line with the need to obtain your for-profit’s assets.
Then, the board of directors will vote on whether or not to buy the assets of the for-profit business, or just a smaller portion of them. They’ll also decide if your price is reasonable.
Fortunately for you, the payment can be made over time, or the nonprofit can fundraise to get the funds it needs.
I’ve advised clients on using this method of conversion as a business succession plan as well as good for the community.
Some states, but not North Carolina, have the option to convert your business entity into a nonprofit. In my opinion, this is messy, especially on the accounting side.
To convert, typically you just have to file articles of conversion with your state registration agency. Some states may require you to file additional information like how the assets will be handled.
I don’t do these, so I’m not an expert, but the actual process can just as easily be done with these other types.
There’s nothing that says you cannot have a nonprofit contract out their services to a for-profit entity. If that’s appealing to you, you can keep your for-profit company and then use the nonprofit to raise funds and meet the charitable mission. The one limitation is that anyone who has a stake in the for-profit business has to abstain from the vote or decision to use the for-profit to meet the nonprofit’s mission. If there’s an equally viable option that is cheaper, the board likely has to choose that cheaper option.
To complete this conversion, simply keep your for-profit set up exactly how it is. Then, you need to create a nonprofit with a full, independent, board. After that, the board will vote on whether to use your for-profit to complete its mission.
For example, if you run a landscaping company, you can set up a nonprofit that does landscaping for low-income individuals. The nonprofit will raise funds and then hire your for-profit company, assuming it’s the best choice for your nonprofit.
This isn’t a comprehensive list of red flags, but these are some of the things I’ve seen that might get you in trouble. If you’ve encountered other sketchy situations, please feel free to comment below so I can see what other red flags are out there!
No Board of Directors/Close Knit Board.
Anytime your board of directors is a small group of friends or family, you raise a red flag. Nonprofits are supposed to be composed of a variety of differing judgments so that no one voice can propel all board members into a troublesome situation. If the board is entirely related, the family dynamics will likely take over and people will follow the natural family leader.
A board of directors needs to base the price of any assets it is buying on some sort of valuation. The easiest is hiring a valuation expert, but the cheapest is to line up multiple potential buyers. If others are willing to buying it for $X, it’s probably worth $X.
A nonprofit would have a hard time buying or working with a company that has no accounting or bad accounting. In every business transaction, this is a red flag.
Now you know how I would recommend you convert a for-profit into a nonprofit. Let me know any pitfalls you’ve encountered!