Converting Your Business to a Non-Profit 

Converting your business to a non-profit is a valid exit strategy. However, there are important things to consider if you choose this path. Here are a few things you should think about if you’re considering converting your business to a non-profit, using a short fictional but representative story. 

Doing Good for Dogs 

Leigh Hightower was reaching the end of her dog breeding and training career. Her business had allowed her to reach her financial retirement goals. As a side project related to her core business, Leigh was also able to rescue countless dogs in her community. 

She wasn’t sure what she wanted to do with her business. Her children had no interest in running it. She feared selling it to a third party because she wanted to carry on her mission of rescuing dogs, which never made money. 

But she did have a loyal team that was dedicated to her mission. However, none of them had experience or desire to run a for-profit business. 

So, Leigh asked her Advisor Team, “How can I keep my mission alive after I leave the business? Can I convert the business to a non-profit?” 

Financial Security First 

A desire to do good is ingrained in many business owners. To do the most good for others, business owners generally need to make sure that they do everything they can to make themselves whole first. Because if doing good for others means that others need to rely on you, it’s in your interest to minimize your reliance on others. 

In Leigh’s case, her Advisor Team stressed that she needed to assure her financial security first. Fortunately, she had been planning for that goal for years. Her company’s value would allow her to sell to a third party and achieve financial security with money to spare. 

But her worries that an outside buyer would discontinue the rescue element of her business made her hesitant. Many business owners face similar fears, even when they have confidence that they can achieve financial security. 

Understand Conversions and Consequences 

If you’re considering converting your business to a non-profit, it is prudent to consult with your lawyers, tax attorneys, and CPAs before you begin the process. 

For example, different states have different rules regarding how converting a for-profit business to a non-profit entity works. Some states allow for a direct conversion, while others require a dissolution of the business followed by launching a new non-profit. 

These differences could have tangible consequences related to your financial security goals and tax responsibilities. Your Advisor Team may be able to reduce complexities and streamline the process in ways that allow you to more effectively achieve your goals. 

One for All, Not All for One 

Another important consideration concerns the structure of a non-profit vs. a for-profit corporation. Whereas a for-profit corporation’s decisions could boil down to what a single owner wants, a non-profit’s decisions are beholden to a board of directors.  

This likely means that you’ll need to assure that you’re crystal clear about your non-profit’s mission and assemble a board that can adequately pursue it. Because unlike at a for-profit corporation, you may no longer have the ability to make final decisions. 

That said, assembling a board of directors shares some common elements with building a strong next-level management team. The biggest difference, however, is that while you can adjust and change a next-level management team within a for-profit, the converse is true in a non-profit: The board makes decisions about whether to retain you as a lead executive. 

In short, a non-profit looks out for the cause foremost, not you personally. For some business owners, this is a massive change they must be comfortable with before committing to it. 

What Did Leigh Do? 

After consulting with her Advisor Team and employees, Leigh decided to sell her breeding and training business to a third party. The sum she sold for allowed her to achieve financial security and gave her additional money to found a separate non-profit dedicated to her mission of rescuing dogs. 

Some of her employees stayed strictly at the for-profit entity while others joined the board of directors at the non-profit, in addition to working at the for-profit. With help from her Advisor Team, Leigh was able to fill out her board of directors with trusted employees and outsiders who could effectively pursue her rescue mission. 

We strive to help business owners identify and prioritize their objectives with respect to their businesses, their employees, and their families. If you have questions on this topic, we can help with more information or a referral to another experienced professional. 

Assisting closely held businesses in Retirement, Business Succession and Estate Planning for 4 decades.

The information contained in this article is general in nature and is not legal, tax or financial advice. For information regarding your particular situation, contact an attorney or a tax or financial advisor. The information in this newsletter is provided with the understanding that it does not render legal, accounting, tax or financial advice. In specific cases, clients should consult their legal, accounting, tax or financial advisor. This article is not intended to give advice or to represent our firm as being qualified to give advice in all areas of professional services. Exit Planning is a discipline that typically requires the collaboration of multiple professional advisors. To the extent that our firm does not have the expertise required on a particular matter, we will always work closely with you to help you gain access to the resources and professional advice that you need.This is an opt-in newsletter published by Business Enterprise Institute, Inc., and presented to you by our firm.  We appreciate your interest.Any examples provided are hypothetical and for illustrative purposes only. Examples include fictitious names and do not represent any particular person or entity.