Is there an advantage to being a nonprofit organization?
Nonprofit organizations definitely enjoy certain benefits that are distinct from for-profit entities, that could be inviting to those interested and qualified to become nonprofit. As an overview of nonprofits and their status within law and taxation, you’ll see that most nonprofits have the advantage of being exempt from federal income taxation. Also, nonprofit entities are not subject to involuntary bankruptcy. Similarly, nonprofit organizations are not subject to the Sherman Anti-Trust Act. Nonetheless, some courts have been recently applying the same anti-trust laws to nonprofit organizations in the same way they are normally applied for profit organizations. In a 1984 California case, the court stated that “practices by nonprofit organizations that economically disadvantage consumers are prohibited even though such practices are designed to advance independent social or political values.”
Some have argued that functioning as a nonprofit has additional benefits as opposed to operating as a traditional for-profit organization. One specific benefit is the idea of service by nonprofit organizations. The general public tends to feel more comfortable and trusting toward hospitals, nursing homes, and other similar institutions that are not-for-profit due to an underlying assumption that such institutions have a purpose other than making money off clients/patients. Beyond healthcare services, members of member-clubs tend to have a preference for a nonprofit organization with a board chosen by the members themselves, rather than a for-profit institution purposed on making profits. The same argument goes for trade associations, as they can possibly serve their members more effectively as nonprofit organizations.
Nonetheless, arguments are made on the side of promoting for-profit organizations for organizations that are purposed for trade and business. Operating as a nonprofit curtails the profit motive that is existent in for-profit organizations; without such a motive, cost-efficiency is sometimes reduced and consumers may not be catered to as proficiently. Furthermore, financing is sometimes a problem faced by nonprofits. Organizations with a charitable purpose, however, must operate as nonprofit organizations and generally have no problem relying on donations and community sponsors due to the nature of their work. Institutions that carry on for trade or business, like social clubs and hospitals, have to evaluate the tradeoffs in operating as a nonprofits and decide what would work best for their organization’s purpose in attempting to gain nonprofit status.
Whether you are contemplating becoming a nonprofit organization or creating any other business structure, consult an attorney to discuss the best options to achieve your purpose.
Jalal Moughania, Esq.