Nonprofits are created with a specific mission: to serve the public good. But what if circumstances change, and you want to transition your nonprofit into a for-profit business? While this conversion is not straightforward, here’s what you need to know.
1. Can a Nonprofit Become a For-Profit Business?
Technically, a 501(c)(3) nonprofit cannot "convert" into a for-profit the way a business can change its structure. Nonprofits are bound by tax-exempt regulations, which include strict rules about assets and profits. However, there are a few ways to shift from nonprofit to for-profit status.
2. What Are the Options?
Option 1: Dissolve the Nonprofit & Start a For-Profit
Step 1: Follow dissolution procedures in your nonprofit’s bylaws and state laws.
Step 2: Distribute remaining assets to another 501(c)(3) charity (IRS rules prohibit private individuals from profiting from assets).
Step 3: Register a new for-profit business with your state and the IRS.
Key Consideration: You cannot take nonprofit assets with you to your new for-profit entity.
Option 2: Create a For-Profit & Work Alongside the Nonprofit
Some organizations establish a for-profit business while maintaining the nonprofit. This could work if:
The nonprofit has a program that generates revenue, which could be spun off into a separate for-profit business.
The nonprofit wants to sell goods or services beyond what IRS nonprofit rules allow.
Key Consideration: The nonprofit must remain independent and follow IRS rules on self-dealing and conflicts of interest.
3. What You Cannot Do
You cannot transfer nonprofit assets to yourself or a for-profit business.
You cannot "sell" your nonprofit to a private individual or company.
You cannot convert tax-exempt donations into personal or private business funds.
Violating these rules could result in severe IRS penalties, including revocation of tax-exempt status and potential legal consequences.
Final Thoughts
If you are considering moving away from nonprofit status, it’s essential to follow the proper legal and financial steps to stay compliant. In many cases, restructuring the nonprofit or creating a separate for-profit business may be a better solution than dissolution.
Need guidance? InstantNonprofit can help you understand your options and ensure compliance with IRS regulations.