Fortify your organization: Alternative org forms

Given the increased potential of attacks around nonprofit structures, we’ve been getting a lot of questions about different for-profit structures. This is meant to be a general primer to help you as you assess your organization’s risk.

First, a few reminders and setting some context:

• If you do receive some sort of notice removing your nonprofit status or challenging your org in another way, FIGHT BACK FIRST. Make it loud, get your membership, community, legal support and elected officials involved.
• Don’t assume you’ll be attacked, keep measuring your own risk.
• Be there for groups that are in higher-risk, or shift into high-risk as political attacks change. Support their efforts to fight back.
• Makes sure to continue your own ongoing risk analysis with the proper legal support to really assess your situation as things change.

Types of For Profit Organizations – General Legal Structures

Sole Proprietorship

This is the simplest for-profit business structure, where an individual owns and operates the business. The individual is responsible for all taxes & liabilities.

Partnership

A partnership involves two or more individuals who share ownership of the business. Profits are divided based on the partnership agreement.

Corporation

A corporation is a more complex business structure that is legally separate from its owners (shareholders). Personal assets are protected from the business liabilities. Corporations are subject to taxes, and if dividends are paid, shareholders may pay taxes on that income.

Limited Liability Company (LLC)

An LLC is a flexible business structure that combines aspects of both corporations and partnerships. It offers limited liability protection to owners (members) while providing more flexibility in management. LLCs can choose how they want to be taxed (as a sole proprietorship, partnership or corporation).

S-Corporation (S-Corp)

An S-Corp blends the benefits of a corporation with the tax advantages of a partnership. This structure provides the limited liability protections of a corporation while also allowing profits (and losses) to pass through to shareholders’ personal tax returns.

Bonus org structure enhancements

There are additional elections you can make to a for-profit legal structure that may align with your mission. Keep in mind that you don’t have to elect any of these, and there may be additional compliance, certification and membership management that may come with these elections.

Benefit Corporation (B Corp)

We get a lot of questions about this one! A B Corp is a certification for for-profit corporations that balances profit with a positive social impact. B Corps must meet certain standards of social and environmental performance, accountability, and transparency. A B Corp is 3rd party (B Lab) standard certification and is not legally recognized at the Federal level by the IRS. It is recognized by some states but there are no current legal or tax benefits at the state or federal levels. Any types for-profit businesses can be a B Corp – including sole proprietors.

Cooperative

A type of corporation that places ownership and/or control into the hands of employees or patrons of the corporation (vs. shareholders in a traditional corporation). Profits are re-invested to the company or distributed to its member-owners.

Social Enterprises

Businesses that are focused on both generating profits and achieving a social mission. While they are for-profit (and can be any of the entity types above), they use their earnings to support social causes.

L3Cs – Low Profit LLC

These are a specific type of LLCs that combines the legal structure of a for-profit business with the social mission of a nonprofit. These relatively new types of orgs, and only recognized in a few states. The IRS treatment of L3Cs is currently relatively uncertain.