Can I Operate My Business as a Non-Profit?

A properly organized and operated non-profit that serves the public interest may be exempt from state and federal income taxes. To ensure eligibility for non-profit status and tax exemption and to avoid abuse, state and federal accountability rules must be followed, including reporting requirements and control by a disinterested or independent board of directors.

If a non-profit wants to receive tax-deductible contributions, the mission must be broad enough to benefit the general public. If the purpose is charitable but only a limited number of people are helped, the non-profit may be exempt from income taxes, but not be able to receive tax-deductible charitable contributions.

For example, non-profits called "mutual benefit" organizations can benefit their members, such as condominium associations or social clubs. Other non-profits may benefit businesses or residents of certain geographical areas, such as chambers of commerce and professional associations (e.g., the American Medical Association).

Since these non-profits benefit individuals to a large extent instead of benefiting society at large, they may be exempt from income taxes, but donations are not likely to be charitable deductions.

Non-profit does not necessarily mean free labor. While many non-profits are driven by self-sacrificing volunteers, there is no legal reason why suitable offices may not be maintained or why officers and employees may not receive substantial salaries and the usual employee benefits, so long as the compensation is reasonable and appropriate given the mission, the activities of the non-profit and the efforts of the employees on behalf of the organization.

Serving the public good and advancing worthy causes has rewards for the individual and for society. Bear in mind, however, that non-profits are governed by federal and state laws, rules and regulations. The latter vary from state to state. Altruism must be tempered by prudence, and it is always prudent to seek and rely upon knowledgeable tax and legal advisers when undertaking any substantial activity.

Jeffrey Steinberger is a veteran trial attorney and the founder and senior partner of The Law Offices of Jeffrey W. Steinberger, a Professional Corporation in Beverly Hills, California. He is also a renowned celebrity attorney, TV legal commentator and analyst, federally appointed SEC arbitrator and professor of law.