| In tough times like these, many people are looking | | | | qualify. Thus, the income from the training portion of |
| for opportunities to make serious changes in their | | | | the business would likely be subject to federal |
| own lives. One option that many consider is a | | | | income tax. Entrepreneurs are far better off turning |
| best-of-both-worlds idea -- to start a nonprofit and | | | | their business idea into a separate for profit business |
| create a good job for themselves at the same time. | | | | and donating a portion of the profits to the |
| Unfortunately, there is often a good bit of | | | | organization. |
| misunderstanding about what it means to be a | | | | The second problem with using the tax-exempt |
| nonprofit corporation, and the realities of running a | | | | status for nefarious purposes is that any income |
| nonprofit do not lend themselves to improving the | | | | received by employees or board members (in salary |
| founder's financial future. | | | | or bonus) is subject to the same employment taxes |
| Nonprofit corporations exist to fulfill needs in society | | | | as any other job. That is, if the organization hires |
| that are not effectively handled by government or | | | | direct employees, employment taxes must be paid |
| private industry. From competitive youth athletics to | | | | either by the organization and employee, as usual, or |
| dog shelters to cancer research, the availability of the | | | | are taxed at the self-employment rate on the |
| nonprofit classification allows public money to be | | | | worker's personal income taxes. The reason for |
| collected and used, tax-free, for purposes related to | | | | tax-exemption is simply to allow the nonprofit to use |
| the greater good that aren't likely to be accomplished | | | | appropriate, related funds, such as from donations |
| any other way. To that end, the IRS has strict | | | | and grants, to further the purpose of the |
| standards for how the finances and activities of a | | | | organization. There is no legitimate way to translate a |
| nonprofit can be handled. | | | | nonprofit's tax-exempt status into a direct benefit to |
| Perhaps the most important factor is that no | | | | an individual, including the founder, board, and staff. |
| individual can be unjustly enriched through the | | | | Most startup nonprofits have limited funds. The |
| activities of the organization. Thus, it is necessary to | | | | salaries of those paid positions that are necessary to |
| justify and explain all instances of payments to those | | | | effectively run the organization must be |
| involved in the organization, from board members to | | | | well-controlled, comparable to similarly situated |
| consultants. To obtain and maintain 501(c)(3) status, | | | | nonprofits, and be completely justifiable given the |
| all transactions of the organization are reported to | | | | purpose and activities of the organization. It is |
| the IRS and are available for public perusal. Any | | | | unrealistic to assume that a startup is going to be |
| questionable circumstances are reviewed by the IRS | | | | able to sustain much in the way of a salaried |
| and a finding of inappropriate activities will result in | | | | employee, especially during the first year or two. |
| the organization losing its exempt status. | | | | Most grants come with conditions attached, and |
| Another common misconception is that the | | | | most are not to be used for overhead (like salaries). |
| tax-exempt status of a nonprofit somehow | | | | Savvy donors will check your budget before |
| translates to an easy path to personal wealth. There | | | | contributing any substantial sum of cash, and they will |
| are two problems with this idea. First, only income | | | | be less inclined to donate to an organization in which |
| directly related to the stated purpose of the | | | | most of the money goes to pay employees. |
| organization is protected from federal taxation. That | | | | If you are looking to make a drastic change, consider |
| is, any income that is not directly related to the | | | | separating the two goals. Start a business to create |
| stated purpose of the club is taxable as it would be | | | | a job and volunteer your time (or some profits) to a |
| in a for-profit corporation. For example, collecting | | | | worthy nonprofit. Trying to accomplish both by |
| adoption fees at a no-kill shelter would be directly | | | | launching a new nonprofit is likely to be frustrating |
| related to the purpose of the nonprofit, whereas | | | | and futile, but setting two separate goals can be the |
| running a side business under the nonprofit that | | | | way to find the path to the future that you want to |
| provides dog training to the public for a fee may not | | | | be on. |