Start-up Guide

Part 2 Nonprofit vs. For-Profit: Which is right for you?

Nonprofit vs. For-Profit: Which is right for you?

In the United States there are three broad categories of business models: traditional for-profits, nonprofit corporations, and non-traditional hybrid models. Within the umbrellas of traditional for-profits and non-traditional hybrid models there are multiple options from which to choose – each offering its own costs and benefits. For more information about each of these business models, click here to view the chart which endeavors to lay out the basics of each model in more detail.

Nonprofit

Before we discuss the challenges and benefits of the nonprofit structure, we should define the core vocabulary involved. (The terms below are often conflated, so it’s useful to have clarity about the differences between them.)

  • Nonprofit corporation is the legal entity most nonprofits use to register with their state government. It is possible to establish a nonprofit organization using another business structure, but a corporation is generally the most appropriate organizational structure.
  • Tax Exemption is achieved when a nonprofit corporation has filed the necessary paperwork with their state government and the IRS to exempt the organization from paying income taxes. At least on the federal level, nonprofit organizations are not automatically tax exempt, and each state has its own tax code and regulations. To find out more about the rules in your state, consult a tax professional.
  • Tax Deductible refers to the kinds of gifts (the most common being cash donations) a nonprofit can receive after they successfully apply for tax exempt status. Tax deductible gifts can be written off by individuals and businesses on their tax returns. The ability to receive tax deductible gifts is a benefit granted to some (but not all) 501(c)(3) charities.
  • 501(c)(3) is the section of the U.S. Internal Revenue Code (the “tax code”) that exempts charitable nonprofit organizations from paying federal corporate income taxes.
  • Private foundations and public charities are the two umbrella classifications of organizations laid out in section 501(c)(3) of the tax code. Anyone looking to start a journalism venture will likely want to be classified as a public charity, as private foundations face a number of additional complex legal rules and restrictions.

 

Organizations with the following purposes are able to apply for tax exemption under section 501(c)(3): religious, charitable, scientific, public safety testing, literary, educational, amateur sports, or the prevention of cruelty to children or animals.

You’ll notice that journalism is not listed there. The IRS has had a long and complicated relationship with journalism which has at times threatened the ability of news organizations to receive tax exempt status. Most journalism nonprofits receive their exemptions as organizations with an educational purpose, but the IRS has specific ideas what educational organizations do. You should review the work of the Digital Media Law Project’s IRS guide before filing for your application for 501(c)(3) status, and definitely consult a tax professional.

 

Here are some things to consider about setting up as a nonprofit:

  • Administrative Costs: Nonprofits require significant administrative coordination including required federal and state documents (such as Form 1023 –the application required of nonprofits seeking tax exemption from the IRS), organizational documents (bylaws, board meeting minutes), and ongoing administrative tasks (IRS Form 990, audits, etc.)
  • Foundations and Donations: Nonprofits are eligible to receive private foundation grants and tax deductible gifts from private individuals. Commercial entities can also receive grants and donations, but donations to for-profit entities are not tax deductible and many foundations often will only make grants to 501(c)(3)s.
  • Nonprofits can make profits: Within reason, nonprofits are legally allowed to make a profit. Nonprofits are permitted to accumulate a reasonable reserve, but they are not allowed to operate with the goal of accruing profit. Nonprofit organizations that seem to be intentionally overshooting their budgetary goals can have their tax exemption revoked by the IRS. Any profits are required to go back into projects that fulfill the organization’s mission. In addition, 501(c)(3) nonprofits may not be operated for the benefit of any private person or group.
  • Taxation: 501(c)(3) nonprofits do not pay federal corporate income taxes, and they often are not subject to state income taxes. Depending on your locality, 501(c)(3) nonprofits may be exempt from other forms of taxation. For more information on the specific tax rules in your state and town, consult a tax professional.
  • Advertising: Within certain constraints nonprofits are allowed to sell advertisements. Many nonprofit journalism sites – including MinnPost, VTDigger, and Mother Jones – include ads. However, it is important that ad revenue is accounted for correctly so you don’t end up paying too much in unrelated business income tax, which can raise red flags at the IRS and result in the revocation of an organization’s 501(c)(3) status. In granting nonprofit status the IRS examines whether newsrooms are operating differently than commercial outlets, so advertising is best used as a supplement to other revenue streams. For more on nonprofit journalism, advertising, and the IRS see the Digital Media Law Project.
  • Endorsements: Organizations with tax exemption under section 501(c)(3) are not allowed to endorse or oppose candidates for political office.
  • Lobbying: Nonprofits are allowed to engage in some lobbying and can engage in advocacy, but there are somewhat complex limitations on both. The resources at Bolder Advocacy offer good guides for nonprofits looking to engage in lobbying and advocacy.

 

For-Profit

While there are reporting obligations and other formalities associated with commercial newsrooms, compared to nonprofits, for-profit news organizations have relatively few rules to take into consideration or abide by.

  • Ownership: As is outlined in the accompanying chart, ownership and managing powers vary depending on the business model you choose. In a for-profit venture the owners are able to maintain close control of their business in virtually all models (the exceptions being a publicly-traded corporation or a benefit corporation).
  • Revenue Generation: For-profits have similar options to those of nonprofits except for being eligible for tax deductible donations. However, if a for-profit news venture wants to raise capital from their readership (in a move analogous to nonprofits soliciting individual donations) they can do as Berkeleyside has done and start a direct public offering (DPO) or other investment mechanism.
  • Professional Compensation: For-profits are permitted to distribute profits, and high salaries do not raise the same kind of suspicions in for-profit ventures as they do in nonprofits.
  • Taxation: Depending on the for-profit business model you choose (click here to see the attached chart for more information), for-profits may be required to pay corporate income taxes. This means that revenue is subject to double taxation –first on the business level and then again when it is distributed as salary to employees.
  • Advertising: For-profits are allowed to sell as many advertisements as they want with no restrictions on the content, and they can include as many calls to action as they want in their political coverage. In addition, they can endorse political candidates for elected office.
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