Susan Linch was kind enough to connect with Greg and I on the phone this evening to talk about the potential financial and legal implications of moving from a non-profit to a for-profit. I’ll do my best to reconstruct my notes, but also encourage everyone to ask follow up questions in the comments. As points of information, we originally incorporated on January 13th and the end to our official fiscal year is June 30th.
The short answer on the potential transition is that the actual work would be very minimal. We’d just have to file a form with the State of Florida to reincorporate our business as a standard corporation. This would replace the non-profit filing we have right now. It’s really just a matter of paper work; Susan says that these types of transitions happen all the time and the state and the IRS don’t mind at all.
So, the actual legwork would be quite simple. It’s understanding the differences between a standard corporation and a non-profit that will make the decision more complex. The obvious thing about a non-profit is that you aren’t taxed by the state or the IRS. If you’re a for-profit, then your profits get taxed. In Florida, however, any yearly profit under $5,000 doesn’t get taxed (the IRS will still tax the organization). The less obvious thing about non-profits is that if you have money left over at the end of the year (i.e. your revenues exceeded your expenses, or you made a profit), then that money can either go towards your operating expenses of the next year or towards the salaries of employees/payments to external contractors. This could, in some regards I believe, work in the same fashion as shares in a corporation.
Shares, and ownership in a company, is a unique aspect to for-profit corporations. Structuring this way would mean that we should divvy up shares in exchange for labor with the understanding that you could get a dividend from the shares when/if CoPress is a more profitable company. Share owners could also sell their shares at a later date.
I’m split at this point now. Earlier, I was more inclined to make CoPress a for-profit corporation because, in my mind, giving out equity in the company was the easiest way to reimburse people for their effort. It would also mean that we could go after a limited amount of investment if we needed money put into the company. Non-profit might still work in our scenario, as I’d still like to be as transparent as possible and focus on our mission. The goal in either regard is to create a mechanism to reimburse anyone that might be spending a significant amount of time with the project in the near future. For instance, if I were to commit 50+ hours/week to CoPress, I’d love to get a payout for my efforts when we do have a more reliable stream of revenue (in addition to receiving a salary at some point).
Because our end of the year was legally June 30th, we’ll have to make our decision for the next year at least by August 1st. After that time, we’ll want to file our tax returns or file for an extension on taxes.
Another important point is that it’s not difficult to switch to a for-profit if we stay on the current track. Switching back to a non-profit is difficult.
Before we make a final decision, I think we should speak directly with others who have start-up and non-profit experience. Once we do, we can caucus and report back to the board.
That is a good point that I forgot to include. Thanks for the reminder.
In addition to talking to people with experience with startups and non-profits, we should probably also take a realistic look at what the numbers might be re: actual revenue for the various parts of our operation.
I actually think I like the non-profit scenario better now. For-profit would require splitting equity among the founders before we actually know how much time each person will put into the CoPress mission. But non-profit seems like you just get paid for your hours, end of story. But in non-profit, would you only get paid for what’s left over at the end… meaning that if CoPress uses all its revenue for development and hosting, then no one gets paid? And does that mean those who contribute only get paid at the end of the fiscal year (not on a by-month basis)?
How does the non-profit vs. for-profit debate impact the taking-on-more-hosting-clients vs. not-taking-on-more-hosting-clients debate, now that we know people can still get salaries/reimbursement?
Re: splitting equity, to my knowledge you can actually split it up so that the equity matures over time. If someone left or didn’t do the work they were expected to, then they wouldn’t necessarily get the equity they originally expected.
Going non-profit would probably mean that, at the end of the first year, we do a split on our profits. Eventually, salary would be covered in expenses and then the profit at the end of the year could either be split up amongst the employees or all or partially rolled into the operating expenses for the next year. With non-profit, however, you don’t split up equity in the company so the money you have the potential to make is based on excess profit and not necessarily the overall value of the company. For-profit means that equity holders have stock in the company (a percentage ownership in the company’s overall value).
In regards to hosting, at this point we’re planning on changing the terms of our service whether we go for-profit or non-profit. I think what we’ll probably do is form a partnership with a hosting company like Web Faction and take on new clients, but instead of hosting them on our own dedicated server, we’ll set them up with their own individual shared accounts and then charge a low monthly fee for guaranteed support.
So… this conversation has also crystalized something for me.
I’ve come to realize that I’ve been approaching the question of for vs. non-profit very differently.
This is not a question of compensation. That, as outlined above, can be had with both options. The real question is 2 fold:
1) which method will allow us to secure funding?
2) what type of culture do we want to set?
I suspect that it will be easier to get funding as a for-profit. But I very much prefer the non-profit culture (for CoPress).
I think we should stick with non-profit, unless I’m otherwise convinced by what we hear from those we contact. If we ever are offered a huge chuck of first round start-up capital, we could decided to file to become a for-profit.
As things stand now, I think our mission, culture, vision, etc. are best served as a non-profit. Nevertheless, I think it’s time for a rate increase and a more realistic transfer/setup fee. We should also discuss whether that should be a, low hourly rate that covers the hosting lead for long hours.
I’m actually split on this now. Greg, do you remember the 990 form that we’re supposed to fill out if we want to continue as a non-profit? That didn’t make it into my notes.
One of my frustrations, however, is this supposed difference in culture between a for-profit and a non-profit. In the social enterprise/ development sector, this is a branding battle they’re having to fight too. There’s no reason we should have to be a non-profit to have a larger mission of improving the tech capacities of newsrooms. Being a non-profit comes with a lot of paperwork and bureaucracy where the only true payoff is that we don’t have to pay taxes on company earnings. You still have to pay taxes on income, and for-profit companies can have social goals too.
The two potentially large advantages of being a for-profit corporation is that we can seek a small amount of investment and the people who are going to be working 20+ hours a week will be able to take partial ownership of the company. It really shouldn’t affect our mission and I don’t believe we should pretend that it would.
Yeah, form 990. Also, remember form 1023.
@Daniel – it’s not a question of affecting our own, internal culture (though, likely, it will to some extent). It’s more a question of how we’re perceived by outside organizations.
Non-profits have a bit of a walk-on-water ability when dealing with for-profits and other non-profits. They’re seen as non-threatening, and capable of having a partner’s interests in mind. For-profits can get that rep, but … well … it’s either hard or uncommon b/c I can’t really think of any profitable for-profits that fit that mold.
@Joey: But it is, to some degree, about affecting our internal culture in the long-term.
Being a non-profit, with all the requisite openness, sets the bar that holds the org to a standard no matter who may be in charge in the future.
Also, getting back to a VERY early discussion about non vs. for, what if the start-up capital comes in the form of an MTV-like scenario. The person/org/group giving money may also want influence on the board or something.
@Greg And money coming from a foundation to a non-profit wouldn’t have influence on the how the organization operates? Keep in mind the 7 month plus pool of quicksand we just got out of.
I’m of the opinion that the tax structure of an organization, let it be non-profit or for-profit, doesn’t dictate the culture of the organization. The people in it do. There are non-profits that are ineffective, money-wasting bureaucracies, and there are for-profits that affect a lot of change. That’s my opinion on the subject.
I completely agree that the people do. But Knight is a pretty big exception for a number of reasons; namely, no other grant I know of would cause us to do what we did, in part because of structure and possible amount.
Also, let’s face it: we hit the ground with the News Challenge in mind. For better or worse, it’s basically always been the sun we revolved around because we wanted that funding.
Again, that’s not necessarily bad because we came really close and it would be awesome, but it’s a lesson I think we’ve learned.
There is always the realism that anyone giving us funding will likely want to have some say in how the organization is run. If I were giving someone funding, that would be a pre-requisite of mine.
@Greg – I do agree that KNC was our center of focus for funding. We now need to look elsewhere. I believe that going for-profit is the easiest way to solve that issue.
However, like I stated earlier: my debate is over giving up the feel of the non-profit approach.
This is a rock and a hard place. Can we continue to exist without funding? Can we continue to exist be going for-profit?
As I mentioned before, we really need to talk with people with hardcore experience on both sides of the equation to make an informed decision.
With that in mind, I’ll write a new post…
Fork the comments!
/useless comment