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My cousin suggested a startup idea to me, I suggested that he could make it a non-profit since it fits all the requirements of an non-profit company and it would be much easier for him to get investment for it that way from NGO investors (like UN projects). It's based in Washington.

He said no, he wants to make it a for-profit company, he intends to make money off it.

My question is, can an non-profit company make profit? Or can it transition to become for-profit? Or can it create a for-profit subsidiary? For instance Mozilla makes millions, FIFA makes billions and both are non-profit companies.

Is that possible? If so, can the transition be made without pissing off the NGO type investors?

closed as off-topic by Dheer, Aganju, Bob Baerker, Pete B., Nathan L Jul 23 '18 at 15:14

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    I'm voting to close this question as off-topic because it's about setting up a company and not personal finance – Dheer Jul 21 '18 at 1:53
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Yes.

A thriving non-profit is likely to have an increasing "reserve" account. These reserves are the equivalent of a for-profit firm's "retained earnings" account.

Depending on the tax and charitable laws in one's country, it is possible for a non-profit to pay a salary to its founder or leader. When compared to modestly profitable for-profit small businesses, the non-profit's leader's salary may be similar to the salary (often called "earnings") for the small business' leader.

There are ways to convert a non-profit organization to a for-profit organization. In the United States, these methods typically involve a (possibly newly created) for-profit organization purchasing the assets and goodwill of the non-profit organization, with the purchase price being used to endow a charity. Sometimes the charity retains an ownership stake in the business. Two examples:

  • The conversion of California's Blue Cross into a for-profit insurance company.
  • The Hughes Medical Foundation's sale of an 80 percent stake in the Hughes Aircraft Company to General Motors.

Also, various mutual life insurance companies and customer-owned banking institutions (such as Savings & Loans and Credit Unions) have converted to for-profit firms. Often these conversions involved the sale of an ownership stake, but did not involve endowing a charity. Instead, it was asserted that the investment would provide benefits to the existing customers and their communities.

There are even ways for a firm (either non-profit or for-profit) to transfer its de facto earnings to institutions that control it, deduct the transfers as an expense, and report zero profits to taxing authorities. Three ways to do this are:

  • The controlling institutions lend a large amount of money at a high interest rate to the firm. (This is a strategy for leveraged buyouts by tax-exempt pension funds.)
  • The controlling institutions rent real estate to the firm. (This strategy was used by the institution that purchased Mervyn's from Target.)
  • The controlling institutions charge the firm for various services they perform. (This strategy is used by many international firms to report low earnings in high-tax countries, and high earnings in low-tax countries.)
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No. Non-profit status confers significant tax benefits that for-profit businesses cannot take advantage of. Therefore, it's a tightly controlled status.

A non-profit company can certainly make money, even lots of money, but it has no stock and no investors and cannot pay dividends like a for-profit company. It can pay salaries and expenses, of course. However, a non-profit must fall into one or more of a list of allowable purposes: educational, religious, charitable, scientific, etc. The money it brings in must be used to further its mission under those categories.

If you're just creating an "ordinary" business that makes and sells widgets, it must be organized as a for-profit business, and pay taxes on those profits, like every other widget maker.

For those reasons, a business cannot start as a non-profit and then transition to a for-profit model. You would have to shut down the non-profit, sell off the assets for cash (or donate them to another non-profit), and then donate the cash to another non-profit. Otherwise a start-up business could be a non-profit, enjoying tax breaks and running on donations, until it figures out how to make a real profit, and then switch and, well, profit.

You can of course start a for-profit school, museum, hospital, etc.; they aren't required to be non-profits. But NGOs and other donors will stay away, and you would have to be a for-profit business from the beginning.

This is specific to the U.S., but other countries have similar rules.

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    The NFL recently transitioned away from non-profit status, it did none of those things you said it would have had to. – Hart CO Jul 20 '18 at 22:22
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    As I understand it (not an expert), the NFL "parent organization" was a 501-c-6 "trade association". The individual teams were never non-profits. The parent organization may have very little in the way of assets, unlike a team with a stadium. I'm sure the rules are different than for a more ordinary 501-c-3. – Carl Raymond Jul 20 '18 at 22:29
  • Yes, trade organizations are typically non-profits, but the NFL has considerable assets that they were not forced to sell to transition away from non-profit status. Similarly, if IRS revokes non-profit status the due to excessive profit, the business does not have to re-start. – Hart CO Jul 20 '18 at 22:30
  • There are lots of state laws about non-profits, as well. I'm in Michigan, where "... when it comes to asset distribution, be aware that a dissolving 501(c)(3) organization must distribute its assets for tax-exempt purposes. In practice, this generally means distributing assets to another 501(c)(3) organization." This is from nolo.com/legal-encyclopedia/…. Other states likely do the same. As for the NFL, I don't know how the hell that worked. – Carl Raymond Jul 20 '18 at 22:46
  • They didn't dissolve the organization. You can change status without dissolving the company, at least that's my understanding. – Hart CO Jul 20 '18 at 22:52
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What you need is likely a type of corporation called a Benefit corporation or B Corporation. This merges the traits of a normal for-profit company and a non-profit.

A B corporation must operate with some social or environmental benefit as its goals, so investors receive some assurance of its purposes. There are also standards and audits to assure investors that it is achieving its positive aims.

On the other hand, a B corporation can make a profit and is taxed as an ordinary for-profit corporation.

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