Non-profit · Education

Deciding between Profit vs Non-Profit Entity

Douglas Tarr Entrepreneur and Software Architect

November 23rd, 2013

Hi,

I have been teaching some 9-11 year old kids (including my own) to code after school out of my home, part time.   I charge a fee for the classes.  

I am going to run a few more classes and I have decided to rent a space.  The response has been good so far and the kids are having a good time.  Most of the kids are from families that I know personally, but as it is spreading to more kids, I won't know them as well.  

So, for various reasons, I think I need to have some sort of corporate entity so that I can get insurance, reduce my personal liability, etc.  Some friends have recommended that I consider a non-profit status for my company as it might help me raise money, grow faster, find cheaper labor, etc.  But, I've heard that trying to raise money as a non-profit can be tough too. 

My personality is more of a "for profit" guy though, and I do have some expectations about being compensated for what I do.  I worry that if I start down the non-profit path, and I would like to take a decent salary, that might cause "ethical" problems.   I'm also skeptical about some of the benefits.  But, that is pure conjecture as I have very little experience with non-profits.  

I'd love to hear from folks who have had to make this decision for their business (profit vs non-profit), and how it went.

Thanks,
Doug

Ryan Nurmela Managing Director at bigCampus, Inc.

November 23rd, 2013

Hi Douglas. I'm an education entrepreneur who has been living your dilemma for the past 4.5 years. I have struggled with the concept of turning my for-profit educational business into a non-profit simply for the fact that I'm not making a huge profit at my two schools and summer camps anyways. I've learned that the distinction between the two can actually be meaningless. For example, if I were to switch my schools to non-profit, the only difference that I'd see is that I could raise money. Here's what I've learned about raising money and grants from working at non-profits: raising money or grants are particularly good for finite projects. What this means for a non-profit is that a non-profit engaged in offering services, especially education, should always always seek to close it's funding gap through fee-for-service methodology, meaning that you need to charge enough money to survive without raising money, otherwise you'll be in non-profit hell - always seeking to raise money to survive. (unless you are really really good at raising money) Keeping your business for-profit, will train you to be self-sufficient and sustaining. You will have no other choice. And if you have a good idea, it is far easier to scale under a for-profit structure. I'm available to take a call if you want. My company is Quantum Campus and my phone number is 510-367-3279. I'm available much of this coming week.

Michael Flynn Co Founder at Bootstrap Heroes

November 23rd, 2013

Hi Doug, Unless you want to start a foundation for teaching kids to code (which is great, if you want to do that), do not start a non-profit. Just create a bank account as a sole proprietor or an LLC (if liability is an issue - $800 annual fee though). You can do this on legal zoom or whatever online service. yes you will be taxed for your income. Founding a foundation is a full time endeavor and not suited for paid personal tutoring. Also, foundations require oversite by committee, which is really a pain/overhead. For profit is all on you.

Preetha Ram CEO and CoFounder, OpenStudy

November 23rd, 2013

What a great idea!  I commend you for that.  I have a for profit startup in the learning space and have friends in ed tech in both for and non profits.  
1. The advantage of nonprofit status is that it is much much easier to enter into partnerships with schools.  They tend to have a healthy distrust of for profits.  Should you decide down the line that you will partner with schools to offer this as an after school activity, it will be easier if you are a nonprofit.  
2. Since you are in the learning space, you could seek funding from foundations like Hewlett.  However many foundations only fund non profits.  
Other than that, the comments of the others are valid and insightful.
Glad to talk further.  And let me know if I can help in any way.

David Crooke Serial entrepreneur and CTO

November 23rd, 2013

B-Corp?

Michael Levinson Product Executive, Marketplaces and Payments

November 24th, 2013

Ask the founders of Couchsurfing about the far-reaching, impossible-to-unwind consequences of starting as a non-profit. Unless you plan to raise significant philanthropic money, do not do it.

Robert H Lee

November 23rd, 2013

Hi Douglas I have dealt with this issue a lot, and can even do the legal work for you, though I tend to refer that sort of work to other people. I'd be happy to discuss. Regards, Robert Lee Startup Consultant & Investor at SV Accelerator: SVaccel.com Entrepreneur-in-Residence at Stanford: codeX.stanford.edu ∩ of Technology & Adventure: facebook.com/HolokaiAdventure @goldspruce, linkedin.com/in/robertlee1 +1.510.427.2049 - California

Alastair Trueger @500 Startups Founder & International Biz Dev

November 23rd, 2013

I personally would go for profit, for a few reasons: 1. It's harder to shift out of non profit down the line if that's what you want to do; 2. There are arcane rules around charities - a delaware corp is better understood; 3. Getting good labor can be a real challenge in non profit - people bounce in and out. 4. The conflict of interest stuff can be a challenge.

Anonymous

November 23rd, 2013

I also agree with the for profit route. If you're main source of funding will be from the parents, then there doesn't seem to be a need to create a non-profit. Non-profit can be more difficult to manage and can limit your flexibility. I have both a LLC for my business and a pending non-profit for another organization that I run. Our non-profit status has been pending for 14 months now and its prevented us for accepting donations in most situations. In addition, we've attempted to fundraise for the non-profit and I find this just as difficult (if more difficult) than raising money for a for profit business.

Michael Barnathan

November 23rd, 2013

You're allowed to take a salary working at a non-profit, so long as it's an arm's length transaction (e.g. based on average salaries for those duties at similar organizations). The organization is educational, so its purpose is an exempt one under section 501(c)(3).

Raising angel/VC money is next to impossible as a non-profit, so your primary sources of funds would need to be public donations, philanthropic grants from private foundations, or grants from local/state/federal governments.

Non-profit status will prevent you from lobbying, and will require that a substantial amount of your business income comes from the exempt purpose (i.e. tutoring). Any income not from that purpose is called unrelated business income, and is subject to income tax (this is called the UBIT).

There are also no shareholders - if the business really takes off, you are still only entitled to your salary, not proceeds from the business. When the business is dissolved, these proceeds are distributed either to another 501(c)(3) of your choice or by a court.

With the exception of the difficulty finding funding, these restrictions probably aren't that onerous to your organization. Consider how you'd like to fundraise (e.g. by soliciting donations?) and weigh these limitations against the exemption from tax on income related to the charitable purpose.

Also note that recognition of 501(c)(3) exemption is a fair bit of paperwork and can take about 6 months.

Gaurav Garg

November 23rd, 2013

Doug, I have been working with a Not for Profit organization on the West coast. Bottom-line is that you will need to run the company operations exactly as if it is a "For Profit" company. The concept of "Non-profit" company does not mean you need to work pro-bono. You can pay your staff salaries, give them benefits, lease company vehicle etc. It simply gives you the access to some tax breaks and grants. As for raising the money, you will need to raise money for a "profit based" company as well. The decision may be based on your exit strategy - do you see yourself selling this company in few years or not. Investors have no way to make money in a "Not for profit" organization. I hope this helps. Have you looked at CodeDojo? I just registered and want to do something similar on the East side. Let me know if you are interested to chat. We can get coffee or beer some time. Cheers! Gaurav