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Converting from Non-profit to For-profit Status

Should you consider changing your organization's status from non-profit to for-profit? Patrick O'Heffernan lays out the five key questions to ask before you make the decision. (February 2007)

conversionShould you consider changing your organization's status from non-profit to for-profit? 

This question has become a major policy issue in the health-care industry, as many hospitals are currently doing so. And social entrepreneurs in all fields are thinking about it as they see themselves harnessing the tools of the for-profit world to advance social good.


There are five key questions to ask if you are considering converting to for-profit, even before you begin exploring what form of for-profit might meet your needs:


(1) What circumstances make this conversion appropriate? 
For instance, you may want to change status because you seek investment funds to smooth fluctuating cash flow so that you can offer consistent services. Or the majority of your income derives from sales, and for-profit status may enable you to expand beyond "mission-related items."


(2) How should your non-profit's assets be valued?
If your organization's assets are largely in the form of donor lists, you will be asset-poor when you convert because the donor lists may no longer be relevant. This may limit your ability to obtain loans or lines of credit despite your for-profit status.


(3) What should happen to the financial assets that remain after the conversion?
If your organization has substantial capital or real estate assets acquired with tax exempt donor funds, will the donors object to them being acquired by a for-profit entity?  Will you owe back taxes on them?


(4)  Will for profit status actually cost you more in taxes than you will gain in access to investment or loans? 
If your organization holds significant real estate or derives significant sales or service income, you will be receiving substantial new tax bills. These may offset any advantages you gain from for-profit status.


(5)  Will switching to for-profit status negatively or positively impact your image? 
This will depend on the area you work in, your clientele and your donors. Often, however, the label "non-profit" invests organizations with a level of respect and trust not accorded private sector firms.


What has your experience been?  Let us know.  Join in the conversation!
Comments: 10

being approached by an investor

Posted by Anonymous User at May 07, 2009 11:08 PM

I was aproached by an investor about privitising a NPO web site. Any thoughts

Re: being approached by an investor

Posted by Jeff Mowatt at May 07, 2009 11:08 PM

Why not Patrick? I presume the investor sees some revenue potential, perhaps advertising, and is offering the resources to improve the format and ranking for mutual benefit?

I've done this kind of thing, albeit on a small scale and free, for unrelated NPOs. I see no reason why it couldn't be offered as a service, on a no revenue/no cost basis taking the overhead of maintaining a web presence away from the NPO entirely. Choose another social enterprise as your investor and both NPOs gain.

Something critical not to forget

Posted by Dan Moore at May 07, 2009 11:08 PM
A word of caution. The assets of the nonprofit must stay in the nonprofit community dedicated to the same purpose for which they have been acquired. So there needs to be a proper valuation of the nonprofit asset and then a disgorging of those assets. You can not expect to change status and retain the nonprofit assets. That's the third rail of nonprofit status
improper private benefit.

There has been a lot of work in this area particularly involving the conversion of nonprofit hospitals and health plans. There are a number of new health foundations that have been created as a result of the change of status. The Foundation Center has a resource page that will help you understand the issues in play. Here's the link: http://foundationcenter.org/getstarted/topical/healthco.html

Use the example of hospitals as a guide. Obviously, there are a lot of important community issues implicated by the conversion of hospitals
a vital community service and a lot of assets. It's important to understand the legal framework that would apply to the conversion of more pedestrian nonprofits. I hope this helps.

To change ... or not to change?

Posted by Laurinda at May 07, 2009 11:08 PM

Interesting topic!

I am a believer in the combination (or better the integration) of both a for-profit and not-for-profit into the same organisation ...

notwitstanding that fact the reality is that it is not easy to convert ... one way or the other ... because historical practices and policies are not usualy easy to integrate into new models or systems ... not to mention the mind-set of the individuals themselves ...

To succeed in any conversion there is a need to start with the people involved in the organisation before any attempt can be successfuly implemented ... and we all know that humans in general are creatures of habit and hate change ...

  • starting point is the need of management to undergo a change process * this needs to be comunicated to all levels in the organisation, training and facilitation will need to take place and the new concept converted into their own belief system and ownership

... and after a period of time .. it may happen!

but without the appropriate planning and buy-in from all stakeholders ... it is doomed to fail.

Laurinda

Agriculture for all

Posted by Mohammad Ziaul Ahsan at May 07, 2009 11:08 PM

A program on agriculture for all at the homestead attended with reproductive health care management & nutrition supplement in the rural community on a special human resources development training & credit program for which people income in a day $1 or less for increase income within 2015 $2. To increase social capital with comprised financial, physical and human capital for MDG 2015.

The program proposes to develop agri-youth in the area creation of jobs and also sustain home nutrition for the children.

The concept note already been written now its time to get fund for the program and also investment. The program i would like to start in the area of Khulna, Bangladesh.

How will you help me or guide me to get support for the program.

Thanking you.

http://ziaul.tigblog.org

Selling a product of an NPO

Posted by Angel Olvera at May 07, 2009 11:08 PM

Is it possible to sell off only one product of my NPO while retaining NPO status for the rest of my products and services? If so what are the rules?

Thanks

Converting from non profit to for profit

Posted by Jyoti Baid at May 07, 2009 11:08 PM

I am planning to start my first company - providing educational services. I'm divided beteween starting as non profit or for profit. If I start as a non-profit and it didnt work out, could I convert to a for-profit if so how would one do it?

Thanks

Converting from non profit to for profit

Posted by Jyoti Baid at May 07, 2009 11:08 PM

I am planning to start my first company - providing educational services. I'm divided beteween starting as non profit or for profit. If I start as a non-profit and it didnt work out, could I convert to a for-profit if so how would one do it?

Thanks

converting from non-profit to profit

Posted by sheba terrell at May 07, 2009 11:08 PM

i need help with writing my amendment. i need to know how do i amend my articles to reflect the new status.

non profit to profit?

Posted by kimberly hamm at Sep 19, 2009 10:44 AM
I am in the process of putting together a business, I have been doing allot of marketing research, before putting everything into a business plan. I am having a difficult time deciding whether or not to go profit or non profit, and if I start as a non prfit can I convert to profit? Also what are the difficulties of doing so? Looking for input and advise.