Can a For-Profit Own a Nonprofit? Your Questions Answered
Whether or not your for-profit business can own a nonprofit organization is a common question. The short answer is, no - not technically. But, as with many things, there’s restructuring that you can do to make it happen.
As you know, nonprofits are different from for-profits in just about every key way, from their operations, to their finances - even their management tools are different. Things get even more complicated in reference to ownership and control structures.
But don’t get discouraged - we’ll answer your questions in depth, so you don’t have to spend any time digging.
Let’s quickly break down the topics we will be discussing:
- For-Profit Ownership of a Nonprofit: Business Laws Your Organization Needs to Follow
- Questions about Business Ownerships
- What is a For-Profit Business?
- What’s The Difference Between a Corporation and an LLC?
- Business Structure Simplified Chart: For-profit and Nonprofit
- What Rules are There For Nonprofits?
- Can a For-Profit Own a Nonprofit?
- Can a Nonprofit Own a For-Profit Division?
- Can a Nonprofit Own an LLC?
- In Summary
Here we go!
For-Profit Ownership of a Nonprofit: Business Laws Your Organization Needs to Follow
As a whole, a lot of questions regarding business, business formation, and business structure are the cornerstone of new online content. This is due largely to the fact that, because of the COVID-19 pandemic, millions of people are looking for new streams of income - since a large percentage of people are working for home or have been unfortunate enough to lose their jobs.
While business ownership laws can be complicated, we’ll give you all the tools needed to make sure you’re doing everything right, whether you own a business and want to form a nonprofit division or donate to a nonprofit, or if you own a nonprofit and want to form a for-profit division.
Emily is ready to learn more about nonprofit ownership!
Because your business type and structure tie very closely into the rules regarding your operations and taxes, the regulations are enforced strictly, so it’s important to know them inside and out. We’ll start by digging into the basics of business ownership.
Questions About Business Ownerships
Before we even dip into the questions involving different types of businesses being able to one another, let’s touch on the functional differences between a "for-profit" and a "nonprofit."
Other than the obvious, the two are structured a little bit differently and to better understand the other questions we have to answer, we should dabble into the basics of for-profit and nonprofit companies first.
What is a For-Profit Business?
A for-profit business is exactly what you’re thinking - the main function of the for-profit business is to generate revenue for the shareholders. There are for-profit businesses that include generating revenue for employees, too, called co-ops - but in those cases, the employees are also owners, or "shareholders," so the foundational concept is identical.
Most places that you visit are for-profit companies such as grocery stores or restaurants; regardless of whether or not they’re a large company or small "mom and pop" shop. This can apply to any type of business.
Anthony is wondering how a for-profit can help his organization!
There are two different types of for-profit companies - public and private - which vary mainly in governance and how they transfer ownership. One thing to note is that for the purpose of this explanation: the terms "stocks" and "shares" are used interchangeably.
Two Different Types of For-Profit Companies:
When it comes to ownership of stocks and shares of a company, there are two types of companies - public and private. These two different types apply to the ownership of shares and whether they can be shared with the public, or privately purchased directly from the company.
Public - A public company is divided into shares that members of the public can purchase. For the majority of public companies, the stocks belong to separate investors. Some of the different types of investors are regular individuals, while some are mutual or pension funds.
Private - The majority of the time, a private company is also a for-profit company. The main difference in the private company is that most members of the general public are not able to purchase shares through public means, such as an exchange. The general population oftentimes can still purchase a company’s shares, but they have to do so privately rather than being able to buy the share on their own.
What is the Difference Between a Corporation and an LLC?
This is one of the more straightforward concepts that we’re going to touch on. The main difference between a corporation and an LLC is simple - it all boils down to who holds the legal liability of the firm. Corporations share main concepts with LLCs, but also have key differences.
Corporations have two choices for taxes - a corporation that pays its taxes itself, or a that pays its taxes through the owners. A "C" is a corporation that pays its taxes while an "S" corporation has its taxes go through the owners.
Corporations have protection against their assets.
Corporations have company formalities. A corporation requires rules to keep their liability protection in check.
LLCs have four choices for taxes and can be either a sole proprietor or a sole partnership unless specified otherwise. The LLC can also select "C" as a corporation or "S" a corporation taxation
LLCs have assistance protection, just like corporations, and have provisions in place to protect the LLC member from losing assets.
LLCs adopt company formalities that include issuing a membership certification and encouraging yearly meetings.
Audrey is learning so much about corporations!
Similarities Between LLCs and Corporations
Corporations and LLCs both offer liability protection to benefit owners and managers
Corporations and LLCs both have tax benefits that aren’t possible with a sole partnership or sole proprietorship
Both business models are separate entities and disconnect from their owners legally by registering with the government
Both business models types file the same frequency with the government at an annual schedule.
Business Structure Simplified Chart: For-profit and Nonprofit
We’ve skimmed the surface on the differences between a corporation and an LLC. But that means we’re just beginning to dip into business, all its structures, and their tax rules too. We get it - taxes are gross - but we’ll keep this as digestible as possible!
A lot of the questions we’re answering and are going to answer involve having a little bit of an understanding of business structures. Let’s break it down simply and highlight the crucial and most significant attributes of each business structure type.
Sole proprietorship. In a sole proprietorship, one person has ownership of the business. The sole proprietor (whoever owns the business) has unlimited personal liability in the event of a lawsuit or criminal charge. In a sole proprietorship, there are personal taxes only - since the owner IS the business, in a way. This business structure is used commonly with freelancers who haven’t established themselves as another business structure such as an LLC.
Partnerships. In a partnership, 2 or more people have ownership of the business. In a partnership, there’s still unlimited personal liability unless it is structured in a way so that one partner has a limited partnership. Those in a partnership have a self-employment tax (except if you’re a limited partner). Partnerships have a personal tax. Even among partnerships there’s different arrangements involving assets and liability that can be customized for the partnership.
Limited Liability Company (LLC). In a limited liability company, usually abbreviated LLC, one or people own the company. As in the title, owners are not personally liable, but there is a self-employment tax. And as with other companies, LLCs will have to pay personal and corporate taxes.
Corporation - C corp. In a C-corp, one or more people are able to own the company. As is the case with an LLC, owners aren’t personally liable. This structure of a corporation pays a corporate tax.
Corporation - S corp. In an S-corp, one or more people own the company, but no more 100 people. All the owners must be United State’s citizens. The owners of this type of corporation have to pay a personal tax, but no corporate tax.
Corporation - B corp. In a B-corp, one or more people own the company. In this model, owners are not personally liable. They are tax except, but corporate profits are not distributable.
Corporation - nonprofit. A nonprofit, like we’re going to learn more about soon, is a company wherein there can be no distribution of profits - all profits must be reinvested into the company or donated. One or more people can establish the company, but they do not own it. Instead, they act as managers, typically called "founders," and perform the duties that a business owner would. Founders can pay themselves a fair salary - which is classified as a business expense - but can not distribute profits unto themselves. Because a nonprofit’s purpose is to benefit the public, it is a tax exempt structure.
What Rules are There for Nonprofits?
Ok, you obviously know all of this, but it’s important to cover the rules behind nonprofits before we can fully understand your rights as organizations.
Oliver is seeing a bright future for his nonprofit!
A nonprofit often has charitable or community-related goals. The founder’s purpose of the company is to use their profits for the community or another indemand purpose of their choosing. Like most companies, state laws dictate specifics in their own states.
Often, a company is registered as a nonprofit for tax exemption purposes. For this reason, nonprofits must follow strict guidelines for what they can and can’t do, how they must operate, and where their money must go. This prevents for-profit corporations from dodging taxes by miscategorizing themselves.
To be a labeled as a nonprofit, you must meet one of the follow criteria:
The nonprofit must benefit the public
The nonprofit must benefit a detailed group of individuals. For example: veterans associations, feeding the hungry
The nonprofit must benefit the membership of the nonprofit
Now that we’ve established this basis, we have a background on for-profit versus nonprofit businesses; we also broken down the key parts of the main different business structures - so, let’s finally tackle the question at heart.
Can a For-Profit Own a Nonprofit?
No - because a nonprofit doesn’t technically have owners. In this context, a for-profit can specifically structure itself so that it can have authority over a nonprofit.
The most simple answer is this: While it can’t own a nonprofit, a for-profit business can align itself to have complete say and control over a nonprofit business without ownership. For-profit can be the backbone and driving factor behind the formation and execution of a nonprofit.
When forming a nonprofit within the realm of a for-profit, it’s important to remember it’s all about certain levels of control within the company that shapes ownership.
For example, a for-profit can exercise control over an affiliated nonprofit through modifications in funding, provisions, and other resources. In particular, a for-profit can issue a grant agreement to the affiliated nonprofit with the idea that the grant will be used to expand a charitable cause. Whether or not the for-profit continues to provide the nonprofit grants is discussed as needed between the two parties.
Marie is ready to negotiate a partnership with a for-profit company!
So while a for-profit business can’t own a nonprofit, they can establish one or partner with one in a way that gives them not only recognition for doing so, but operational control over the nonprofit as well.
From a sociological perspective, a for-profit sponsoring or establishing a nonprofit can have powerful benefits for the for-profit. People like doing business with good people - and letting a for-profit company support your worthy cause is a great way to showcase both your goodness, and theirs!
If you think about it, there are a lot of for-profit corporations or businesses that partner with, or even establish, charities or nonprofits. Local grocery stores now will ask you if you’d like to include a small donation to a nonprofit company during your check out. Such an arrangement is beneficial not only to your non-profit in the form of funds, but also to your partner companies in the context of their brand! This kind of partnership can be a real asset when recruiting volunteers and encourages the growth of your membership engagement strategy.
When done correctly, it can be extremely beneficial to a profitable company to create its own charity. A nonprofit having a for-profit ownership can create stability, growth, and more benefits for the community as well.
Can a Nonprofit Own a For-Profit Division?
The answer is yes - nonprofits can own a for-profit subsidiary, or entity. A nonprofit can own a for-profit entity regardless of whether or not it is a corporation or limited liability company, but there are rules pertaining to any money invested by the nonprofit during the start-up process.
Here is how the rules breakdown:
Nonprofit Investing in a For-Profit Rules
The donor individual or company, or taking over nonprofit company, must be participating in the restructuring for charitable purposes
Each person participating in the investment is trusted to manage the funds in the same way someone else would if in the same position. Each party is trusted in good faith.
When an institution or organization invests, it will:
Possibly need to incur costs within a reasonable comparison to assets and funds.
Is expected to make reasonable to confirm facts that pertain to the investment of the fund.
Can a Nonprofit Own an LLC?
The answer is yes - a nonprofit can own an LLC. As long as the regulations for a nonprofit owning a for-profit business - stated above - are followed, a nonprofit can own an LLC.
Thomas is crunching the numbers on how to establish his own LLC!
Reasons a nonprofit may choose to establish an LLC include:
The nonprofit may choose to own an LLC to protect itself when dealing with the risks and liabilities that are linked to the assets of the LLC. This may become the nonprofit’s plan if the LLC has an elevated profile risk compared the nonprofit’s own assets and activities.
Another reason the nonprofit may choose to establish an LLC is to conduct the business that isn’t solely interested in getting ahead in its exempt purposes without being seen as a revocation of a tax exempt status. This is often done when a nonprofit wants to conduct unrelated business that is bigger in scope and in size. When this happens, the LLC will not be exempt from taxes.
Lastly, a nonprofit may want to acquire an LLC to operate under one or more other entities. In this case, the LLC may be tax-exempt if all of its members are composed of nonprofit and for-profit organizations.
We’ve explored and broken down some fundamentals of business structures to answer the main questions at hand - can a for-profit own a nonprofit? The answer is technically no, but they can be the front runner of the creation of a nonprofit. A nonprofit -- being that it isn’t for-profit -- can't be "owned" because their funds that are collected aren’t for the intention of an individual or party.
As mentioned earlier, nonprofits aren’t owned by somebody, they’re formed by somebody. When designed this way, nonprofits can be super advantageous on being the driving force behind a for-profit. Like previously discussed, the purpose should be genuine and compassionate in nature, or else it can be detrimental to the business rather than helpful.
For you and your potential business partners, some other questions may come up after being presented with the many possible business structures, so we’ve covered several different variations of potential questions. We answered whether or not a for-profit can own a nonprofit, and if the opposite is true - whether or not a nonprofit can own a for profit. They sure can, and we covered a few of those details too.
So long as certain rules are followed, a nonprofit can own a for-profit division with no issues. Doing so can help generate funds, pushing the cause further than possible with just donations.
Anyone can start a nonprofit - or any kind of business - in America with comparative ease. With tools on the internet becoming more and more sophisticated, if easier than ever to start and grow a business. Whether it is the use of tools like a powerful CRM software, or an individual coach that can work closely with you one on one to help you grow. The resources are out there, aspiring business owners just have to find them.
Springly is an all-in-one software designed for nonprofits. Find out why over 15,000 nonprofits trust us with their daily management! Try it free for 30 days.