For-Profit vs. Not-for-Profit Organizations.
Most new businesses wisely organize within some vehicle–typically corporation or LLC–which limits future liabilities and offers substantial protection to owners. What is less understood are the differences between choosing a for-profit and not-for-profit organization.
For-Profit Organization
When setting up your organization, you use standard state charters for a corporation, LLC, or other limited liability structure. Tax rules are generally more straightforward. One need not concern themselves with the IRS rules and stipulations which the IRS applies to non-profits. The for-profit corporation, owned by shareholders, may sell shares to others and keep the proceeds. A for-profit ABA practice need have no concern over how much of their revenue comes from public sources (such as Medicaid or other government-funded sources).
Non-Profit Organization
When applying for a state charter, make certain that you organize as a non-profit. Your state may require that you form a new corporation should you later change your mind about which status you prefer. If forming a new corporation becomes necessary later, you will likely have to start all over again with negotiating contracts and credentialing with insurers and Medicaid, etc.
Application for IRS Non-Profit Status
After incorporating as a non-profit, you will make an application with the IRS for non-profit status. The application is generally approved automatically, as long as it is thorough and appropriately prepared. The IRS will then allow a five-year test period during which the non-profit must show averages that fall within specific guidelines, particularly concerning revenue sources.
Qualifying Revenues
Of particular concern is the requirement that non-profits obtain at least 33.3% of their revenues from “public sources.” Public sources include qualifying charitable contributions and fees for services received from public sources. Typical public sources for ABA services include Medicaid and county government contracts. Limits apply to how much from each source qualifies. ABC Behavior has operated on a non-profit basis, providing services predominantly for Medicaid clients. If we ever had so much private insurer business that it threatened our qualification, we would likely form a separate for-profit corporation for private insurance work and continue to maintain the non-profit for Medicaid work.
Taking Tax-Deductible Donations
Once the IRS issues 501(c)3 status, your non-profit can accept tax-deductible donations. However, before soliciting for such donations, check your state’s requirements. Virginia, for example, requires a submitted application before soliciting donations.
Tax Exemptions
A non-profit, tax-exempt corporation can typically claim exemption from a variety of taxes, including federal income taxes, state income taxes, state sales taxes, and even state property taxes on real estate dedicated to non-profit work. (Renting real estate to a for-profit business disqualifies the property from real estate tax exemption.)
For-profit vs Not-for-profit Organizations
Federal Student Loan Forgiveness Programs
Student loan forgiveness programs involve making payments while employed for either a government agency (such as a public school system) or a non-profit corporation. The more substantial program requires payments for 120 months while so employed. Such payments need not be consecutive. An individual’s completion of the program ostensibly provides to them 100% TAX-FREE FORGIVENESS OF ALL STUDENT LOAN BALANCES REMAINING OUTSTANDING. Such a benefit is potentially enormous to anyone with student loans. Many BCBAs, therefore, stand to enjoy a substantial advantage working for a non-profit. Please note: anyone hoping to qualify should associate with the non-profit as an employee, not as an independent contractor.
Control
A single individual can maintain a level of control of a non-profit by establishing herself as the sole “member” and giving power to the member(s) to select members of the board of directors. However, to maintain 501(c)3 status, no group of directors may exceed 33.3% of the total number of board members if they are personally related. For example, if a husband and wife sit on the board of directors, in order to qualify under the IRS rule, the board must include at least four other persons not related to the husband or the wife. Further, the board must be vested with the power to control the direction of the company. It may, and generally does, assign day-to-day management power to an officer (who may also be a member and/or director). Still, critical functions such as selecting officers and determining their compensation should belong to the board of directors.
Ownership/Disposition of Property
Non-profits are not technically “owned” by the members or any particular individuals. They organized with some designated purpose for the good of the general public. As such, they must operate under certain restrictions that do not apply to for-profit corporations. Nevertheless, within the boundaries of those restrictions, substantial liberties apply to those running a non-profit. For example, individuals can be paid significant salaries–particularly if those salaries are funded by program revenues rather than donations and do not diminish the net assets of the non-profit. However, restrictions limit the distribution of proceeds from the sale or dissolution of the assets or organization to some other qualifying entity such as a church.
Disclaimer
The information in this article constitutes an introduction and cursory overview of the subject matter. It neither covers every contingency or possible exception to any given situation nor offers legal advice. Those interested in forming a corporation or LLC to establish a business are encouraged to conduct further investigation necessary to resolve any questions involving the particulars of their circumstances. A qualified attorney, accountant, or tax professional may offer advice.
