‘Should I change my business to a not-for-profit?’

This is a question I see a lot in business groups on Facebook.

The first answer is ‘Ask your accountant.’ And the second answer is ‘Probably not.’

Most people are attracted to the idea of converting to a not-for-profit because the vast majority of grants are exclusively for this entity type. But the chance at a cash injection might not be worth what you have to give up as a business owner.

Let’s look at what a not-for-profit actually is

A not-for-profit is a membership-based entity that is governed by a constitution that dictates (through its Objects) the purpose of the organisation and by extension, what it can do. It can ‘make a profit’ but the funds must be reinvested into achieving its purpose, rather than being taken as benefits by the members. The organisation can save any profits, but it needs to be with the intention of a future purpose aligned with its goals (for example, replacing infrastructure or saving up to deliver a particular service).

Now let’s consider what your options are when it comes to establishing one

The first thing you need to be aware of is that as a not-for-profit, the business is no longer ‘controlled’ by one person. So you are no longer the sole decision maker. Nor would you ‘own’ the business.

You’ll need to check the specific rules for your state, but this is a rough guide.

Instead, you would need to form a membership base and develop a constitution. Your membership would elect a management committee or board. Your state will likely require the organisation to lodge a form and a copy of your constitution, as well as registering with ASIC (if you are based in Australia).

What are the implications for your control of the business?

Once you’re up and going, your board will decide on the strategic direction and oversee the governance of the organisation. The board may be paid a sitting fee to recognise their contribution in attending board meetings, but it should be commensurate with the financial capacity of the organisation and should not be excessive.

To implement the strategic direction identified by the board, the organisation may use volunteers or paid staff. People who receive a pecuniary benefit should not also hold a position on the board. Employees are employed by the board so it’s not appropriate for them to also make decisions about their activities (and wages!)

If you become an NFP you will basically relinquish control of decision making about the organisation to the membership, who elect a governing board.

You could nominate for (and possibly be elected to) the position of Chairperson and hold influence that way (but remember, there will be other board members who will get to vote on what happens too). For some time, you might hold that position. But you could be voted out of that position, or even off the board altogether (you could remain as a member of the organisation). And most constitutions have mechanisms to avoid someone being on a board indefinitely.

You could also manoeuvre to be employed as CEO, but then you are the employee of the board (and they get to set the strategic direction). You might miss out on the job as CEO or in the future, the board might direct you to take the business in a different direction (or even sack you!).

Having seen a few organisations run by CEOs who had ‘puppet committees’, I can say with a fair degree of certainty, ‘things will go badly’ as eventually, any funders will realise something funny is going on. This is especially likely, as many states now require not-for-profits over a certain turnover to submit independently audited financials each year.

Either way, it is no longer ‘your business’

Still think you want to explore becoming a not-for-profit? I’d suggest contacting the organisation in your state that oversees the governance of not-for-profits and chat to them about your options.

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A version of this blog post first appeared on Anna Dixon Consulting’s website, our previous brand.