When clients come to a Sacramento small business lawyer for advice in business entity formation, there is an implied presumption that the business’s creator wishes to organize the business as a for-profit entity. For-profit entities are the classic business model: the business offers products or services and tries to realize as much profit as possible. In the for-profit model, any surplus revenue that is not reinvested in the business or use to cover overhead costs such as wages or rent is retained by the business owner. The goal of a for-profit entity is simple: to generate as much profit as possible and enrich the owner.
But what if someone is trying to start an organization in which profit is not the primary motivation? Suppose the business model is to deliver meals to elderly residents as opposed to selling coffee and pastries at a corner shop. If the business model you envision is primarily concerned with philanthropy or compassion, or your motivation is drawn from a strong belief in a particular cause other than profit, you may want to consider incorporating your entity as a non-profit corporation.
Non-profit corporations enjoy many of the same benefits of their for-profit cousins. For one, incorporating as a non-profit confers legal personhood on the entity, meaning that the non-profit can sue and be sued in a court of law. As we have discussed in previous posts, the entity’s legal personhood tends to absolve the personal liability of any individuals who serve the entity as long as their actions were performed in the scope of their work for the entity.
Another tremendous advantage of incorporating as a non-profit entity is that non-profit entities are almost always exempt from paying federal income taxes. However, in order to achieve this tax exemption, non-profit entities must petition the IRS for tax exemption under 26 U.S.C. 501(c)(3). This must be done in addition to any California state charter documents, sometimes called articles of organization. Due to this complexity, a Sacramento business attorney is your best bet at understanding what filings are required of your organization, what must be included in the filings, and how best to organize the paperwork so that the state and federal governments are more likely to grant non-profit entity status.
A word of caution when starting a non-profit entity: any surplus funds generated by the entity must be recycled into the community and must not find their way into the pockets of the entity’s officers. Officers of a non-profit entity are entitled to compensation at the fair market value for their professional services in their geographic area, but may not receive bonuses when revenues exceed expenditures.
If you are considering starting a business model in which profit is not the main goal, you should consider contacting a Sacramento small business attorney, who can bring you up to speed on your options when it comes to entity formation and the incorporation process. Non-profit corporations are wonderful ways to advance a particular cause or to bring a valuable service to the community without the tax burdens of typical corporations.
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