Q: How do I change my business to a nonprofit?
A: Business owners sometimes find that their original purpose changes. Some owners decide to change their business from a limited liability company or a corporation to a charitable nonprofit. But the law limits the operation of nonprofit organizations, so owners should be certain they understand the consequences before making this major change.
To convert an existing registered business to a nonprofit, the board of directors may vote to close the original business or to amend its articles of incorporation before starting the nonprofit. In either case, all existing shareholders relinquish their ownership interest in the original business. Dissenting shareholders may prefer to cash out rather than becoming involved in the new organization, leaving the owner with fewer assets available to the nonprofit than anticipated.
The new nonprofit will have a different focus. While a corporation seeks to build shareholder value, a nonprofit focuses strictly on its charitable mission. To obtain and keep tax-exempt status, the nonprofit’s activities must all fit within its new stated purpose. Owners interested in changing only to reduce taxes or costs will find that those advantages are small compared to the requirements of maintaining nonprofit standing.
Assets from the original business that are moved to the nonprofit will be dedicated to the new organization’s charitable purpose. It may be impossible to reconvert them to a for-profit use at a later date, so the owner should be certain that the change is truly desired.
Minnesota also offers a middle option. A public benefit corporation (“B Corp”) allows a business to establish a social benefit as a goal of the organization.
Choosing this business form clearly communicates that profit is not the only desired outcome. This added focus may attract investors, customers and employees.
A B Corp is otherwise operated as an ordinary corporation and does not receive any special tax treatment. Despite regular business taxation, many choose a public benefit corporation as the best business form for their combined commercial and social goals.
Stacey Supina is on faculty in the ethics and business law department at the University of St. Thomas Opus College of Business.