Updated: May 21
You are an education entrepreneur. You have a great idea (or two!). Who has time to start a nonprofit?!? Recruiting a board, creating bylaws, incorporating, and applying for 501(c)(3) status? No thanks! Wouldn't it just be easier to start an LLC? Or just operate a Sole-Proprietorship? Well.... that depends...
First, it's important to understand that business structure is established in and governed by your state--not the IRS. You become a nonprofit in your state. Nonprofits are not tax-exempt. You become a tax-exempt 501(c)(3) by applying to the IRS. Those are two separate and independent processes.
Next, let's define terms:
An LLC (Limited Liability Company) "is a U.S. legal entity used to own, operate, and protect a business. LLC's provide the same legal and financial protections corporations do but can be simpler to operate."
An LLC is a for-profit business owned an operated by one or more individuals (known as a multi-member LLC). This means that YOU own the business (yes, your program is a business). If your program turns a profit, the profit belongs to you. The same is true if your program experiences a loss. An LLC is fairly simply to start and operate. You file Articles of Organization and create an Operating Agreement (similar to nonprofit bylaws). An LLC can but is not required to have a Board of Directors.
A Nonprofit is an "organization that works to serve a public purpose, rather than provide financial benefit to any particular individual, corporation, or entity."What is the difference between nonprofit and tax exempt? (cullinanelaw.com)
Nonprofits are incorporated at the state level and must be operated by a Board of Directors and bylaws that govern operations. A nonprofit can generate a profit, but the profit must remain with the organization and cannot be distributed to any private individual.
Assembling a Board of Directors (and learning how to operate as a board) can be a fair amount of work. As is drafting and adopting bylaws. Why not just become an LLC?
Benefits of Becoming a Nonprofit:
1. Nonprofits can have volunteers.
If you're reading this blog post, most likely, you're working in (or starting) some form of educational program. In homeschool and many other educational programs, volunteers are critical to the operation and success of the program. This is why this point is #1. If you operate the program as your for-profit business (i.e. LLC, sole-proprietorship, etc.), then it is YOUR business and you are subject to Fair Labor Standards just like every other business. The Fair Labor Standards Act prevents for-profit businesses from using any volunteer labor. Anyone performing labor for the business must be compensated. The only exception is a non-profit and some public businesses.
2. Nonprofits can be tax-exempt (501c3).
A nonprofit can apply for 501(c)(3) status with the IRS using form 1023. This form can be extensive (unless you can use the 1023-EZ) and can be spendy upfront ($275 or $650 to the IRS). However, it grants 501(c)(3) organizations tax-exempt status and often this status allows for state-tax exemption in many situations.
A for-profit business must file a corporate tax return each year and pay corporate taxes (21%) on any profit remaining after expenses. Perhaps your business doesn't generate much (or any) profit. Then corporate taxes may not be a big factor. But it's definitely something to keep in mind if your program grows! Another factor to consider: if you are an LLC and do not elect to be an S-corp, ALL of the revenues generated by your program will be reported on your personal tax return. Even if there were no profits made, this revenue may push you into a higher tax bracket and could impact eligibility for various IRS tax credits.
3. Nonprofits can receive tax-deductible donations (if they are a 501(c)(3)).
If your organization receives 501(c)(3) status, then any donations you receive are a tax-deduction to the donor. This is often a large incentive to donors!
4. Nonprofits are eligible for grants and other perks (if they are a 501(c)(3)).
Most foundations and organizations awarding grants require an organization to be a 501(c)(3) in order to be eligible for grant funding. 501(c)(3)'s are also eligible for many other perks including discounts and fundraising programs. One of the biggest perks I've personally noticed was the eligibility for programs offered through TechSoup. The hybrid organization I run has personally benefitted from deeply discounted software through TechSoup including QuickBooks, Canva, Adobe, Microsoft 365, and more. We save thousands each year thanks to these discounts.
Another "perk" to consider of becoming a 501(c)(3) is the ability to rent/share space at a church. As alternative ed. programs continue popping up all over the country, we are hearing more and more stories of churches having their property tax exemptions threatened because they are (often unknowingly) renting space to a for-profit business. The same rule often applies to public parks and libraries. Property tax laws vary by state and sometimes even county, so do your homework on this one.
5. Nonprofits are often held in high regard.
This one is not as much of a tangible benefit, but is a benefit nonetheless. It is important to consider what others may think of your business structure especially if you want your program to have a close sense of community. If participants in your program realize that the program is actually your personal business and that any/all profits end up in your personal bank account, they are, by nature, less inclined to "buy in," which can be critical to the success or failure of a program.
6. Nonprofits do not usually rise and fall with the founder.
This point can be a little bit touchy for some leaders who will be/have been the driving force behind their program so far (aka the "blood, sweat, and tears"). Nonprofits are run by a Board of Directors. The founder and program director is often ON the board and is an integral part of the program, however, nonprofits are intended to be structured to continue successfully even after the founder is gone. In the beginning stages, you may not even be able to imagine that someday this would not be your baby as much as it is today, but take it from me, you are probably an entrepreneur at heart. And guess what? An entrepreneur's average time in the same job/project is somewhere around 5-7 years. You had the crazy idea to start this program. It's likely you'll have another crazy idea in a few years! It would be a shame to move on and have all your hard work and wonderful program die with your departure. I have personally been with the organization I founded for almost 10 years. And yes, I'm preparing for my departure as I move full-time into my role supporting education innovators. But the organization I founded is a nonprofit run by a board. I have been training campus directors for over a year. And they're going to be just fine without me. My kids will continue attending. It's perfect! You may not be able to envision anyone else caring for your "baby" at this point, but do yourself a favor and realize that's a possibility and plan accordingly.
Not sure if you're an entrepreneur at heart? This article explains it well.
Hopefully this has been helpful in your decision to form a nonprofit or for-profit organization. Please don't think you can just "do nothing" (not form legally at all) as that will usually come back to bite you. Read my "Do Nothing" article here.
Approximately 80-90% of all homeschool programs are nonprofits. Don't be intimidated by the process of becoming a nonprofit. I have lots of resources available and offer consultations and other services to help you along the way. Keep up the good work!