By Karen E. Klein Q: I am setting up a for-profit corporation to provide independent-living skills to members of my community. I do not have the financial resources to fund the startup costs, and would like to know if a for-profit corporation is allowed to solicit funding, ask for donations, or engage in fund-raising activities.
---- J.P., Albany, N.Y.
A: What you are selling -- either a product or a service -- may indeed be beneficial to some community members, you are not in business mainly to benefit others, but to make a profit. If this principle is not the guiding light of your business, think about establishing a non-profit entity rather than a for-profit enterprise. Too many small companies fail because entrepreneurs fool themselves into thinking that helping others, expressing themselves creatively, or serving the community is the No. 1 goal for their companies. Wrong.
Fund-raising activities are regulated by many states in an effort to protect the public from unscrupulous people and scam operators who solicit money untruthfully. If you want to ask for donations or engage in fund-raising activities as a for-profit business with a charitable bent, you will need to register with the state, be honest with your donors about the nature of your company, and make sure they realize that they cannot claim their donations as charitable deductions, says John Lynagh, a partner at the New York City-based law firm of Kelley, Drye & Warren.
Such a scenario is not likely to be attractive to many potential donors, who want the benefits of contributing to a tax-exempt organization. "If you're creating a for-profit and intend to make money, even if the service has a charitable connotation, people are not likely to make a contribution because they wouldn't get a tax
deduction for it," Lynagh says.
RED-TAPE TANGLES. When you start a business, even one with a good purpose, anyone who gives you money toward your startup costs is going to want something in return, usually equity in the company or interest on a loan. If you don't have the money in your pocket to start the company, it is probably best to delay the opening until you can raise the funds the way any other startup does, by saving money and putting your own seed capital in, borrowing the cash, or selling stock, says Abraham Mathew, a Los Angeles attorney.
Alternatively, you could create a non-profit corporation by filing with the IRS and your applicable state tax authority asking for tax-exempt status under IRS code section 501(c)3. Says Lynagh: "The corporation's purpose will have to fit within state statutes, although it can have a quasi-business purpose. If you get a tax exemption, you'll be able to raise money and people will get a deduction for giving it to you, and you can hold the funds and earn interest on them without paying taxes."
Establishing a non-profit is a fairly complicated process, and you should get the advice of an attorney or accountant before proceeding, the experts say. Because tax laws for non-profits are significantly different from those that apply to for-profits, and because changing between nonprofit and for-profit status is complicated, make sure you explore the options with your professional advisor and decide on which type of corporation is best for you. Additional background information on issues such as corporate legal structures can be found at Web sites like FindLaw. Have a question about running your business? Ask our small-business experts. Send us an e-mail at email@example.com, or write to Smart Answers, BW Online, 6th Floor, 2 Penn Plaza, New York, NY 10121. Please include your real name and phone number in case we need more information; only your initials and city will be printed. Because of the volume of mail, we won't be able to respond to all questions personally.