From arts organizations to farm-to-table restaurants, the Hudson Valley is rich with creative and entrepreneurial folks sowing the seeds of their passions. While the ground for new endeavors in the region is certainly fertile, however, that doesn’t mean the path to success will be simple. If you’ve been hankering to strike out on your own and found a new business or organization, one of the most important decisions to make early in your planning process is whether to make your operation for-profit or a charitable nonprofit.
For those who are both entrepreneurial and philanthropic, it can often be a struggle to decide which route to go, says Gary M. Schuster, a partner at Walden-based law firm Jacobowitz and Gubits, whose practice includes formation, transactions, and counseling for corporations, LLCs, partnerships and nonprofits. Here, Schuster provides valuable insight to entrepreneurs navigating this critical juncture.
Nonprofit Eligibility Is Wider Than You May Think
While you may think the types of activities eligible for-profit or nonprofit status are set in stone, there are actually many that can fit either operational structure, says Schuster. Schools, theaters, medical providers, art galleries, restaurants, and daycare centers are all among the activities that can be organized as either, depending on how they are formed and operated, he says. So how can you decide what’s right for you?
An initial question you should ask, says Schuster, is whether or not your prospective activity is charitable. “For centuries, charity included feeding the hungry, healing the sick, relieving poverty, education, and religion,” he says. “More modern charitable purposes include science, arts, culture, the prevention of cruelty to children or animals, economic and community development, and environmental conservation. If the proposed activity is charitable, there is the option to organize as a charitable nonprofit.”
Consider the Costs to OperateThe second question he recommends you ask is whether the activity can cover its costs by selling its goods or services. “Yes, even charities sell goods and services,” Schuster says. An example he provides is that of a theater, which could have monthly costs of $50,000 to operate. If the theater has 60 seats, runs eight shows a month, and sells out every show, it must charge $104.16 a ticket to break even using just ticket sales. It’s important to think critically about whether your customers can afford or will want to pay the pricing you need to operate. If not, he says, it may be possible for the organization to form as a charity and supplement its earned income with charitable contributions.
Reasons You May Not Want to Organize as a Nonprofit
While becoming a charitable nonprofit may seem like the easy choice for organizations that fit those criteria, Schuster says that there are some very important reasons that you may not want to pursue the nonprofit route. “First, every nonprofit must be governed by a board of directors of at least three people,” he says. “Working with committees is very different from simply being a boss. The founder may not want to have to persuade other people to take various actions when running the business.”
Also, he points out, in New York, employees of nonprofits may only be paid “reasonable compensation for services rendered.” According to Schuster, “reasonable compensation” varies depending on the circumstances, but essentially it means that employees can only be paid what comparable employees are paid at comparable nonprofits. The “services rendered” part means there is no distribution of profits or dividends, only the salary. For many entrepreneurs, he says, this is simply a non-starter.
There are, of course, many other considerations you’ll need to make in forming your for-profit business or nonprofit organization, as well as variations on operations that can involve subsidiaries, affiliates, and other mechanisms that can help you pursue both your entrepreneurial and charitable goals. Ultimately, advance planning with an experienced team that knows the ins and outs of for-profit or nonprofit financial management and organization is highly recommended, says Schuster. “Generally though,” he continues, “where there is a will, there is a way.”
You can learn more about the law firm of Jacobowitz & Gubits at Jacobowitz.com.