Lesson 2: Type of Business
Non-profit status
Most people who start a small business do not consider starting as a non-profit or "not-for-profit" business. If the business you're considering is at all in the public interest, then non-profit status is something you should look into.
Most jurisdictions have non-profit organizations actively competing with for-profit companies in many fields. Some that come to mind are theatre, clubs, health and education. I know of an Internet service provider which is non-profit and until recently a local weekly newspaper was non-profit until it changed its status and was sold.
While you're not allowed to make a profit and you can't sell this kind of company, you are allowed to pay yourself a fair amount for the work you do. Since most small business owners would be only too happy to be paid market value for their work, this is not necessarily a problem.
Non-profit companies have several advantages over for profit ones. Their incorporation and reporting fees are usually lower. If they pay any taxes, they get preferential treatment. And, if you are in fact providing a service to a community, being able to say you're non-profit is a big advantage at the customer level.
Because the rules for non-profit companies differ quite a bit for different jurisdictions, here are some things to watch out for:
- Who controls the company? Are you allowed to name two other family members to a board of three or do you have to have a larger number of arms-length directors?
- Reporting is stricter. Nobody cares if your private small company keeps poor records but non-profits have to keep track of all money to keep their status.
- What are the rules for dropping your non-profit status at a later time?
- What happens when the company is dissolved? When I started my first non-profit I gave the job of the documentation to a lawyer and asked him to do something general and standard. I was surprised to see a by-law section which said that, upon dissolution, assets would be distributed to the directors.
While not for everyone, incorporating as a non-profit company should be of interest to small businesses in certain fields. It makes the whole exercise less risky, more likely to be viable and, hey, you're even doing good.
