Can You Buy a Nonprofit? What are the Rules?
Can You Buy a Nonprofit? What are the Rules?
No, you can not buy a nonprofit, but there are a few gray areas where one can be acquired. As always, there are factors to consider when trying to buy or acquire a nonprofit and ways to get around the limitations. In this article we’ll explore the concept of buying or acquiring a nonprofit and some of the more common misconceptions there are surrounding this question.
What Makes a Nonprofit Business Different?
The reason that you can not buy a nonprofit outright is that there is no real owner of a nonprofit. Unlike regular for-profit businesses, there are also no shares for a nonprofit business. Even the Founder of the nonprofit does not own the entity, although they may feel like it is their business or charity, in the eyes of the law they do not own any part of their own nonprofit.
The simplest form of business organization is the sole proprietorship where the person creating the business owns the entire business. They are responsible for all profits and liabilities and if the company goes bankrupt, they are also liable for all debts the company owes. This is the same for partnerships and other small business make ups.
Corporations on the other hand have shares that represent ownership. There can be as little as one share and one shareholder. The major difference between a sole proprietorship or partnership is the responsibility when it comes to debt. A corporate structure separate legal entity from the owner of the shares so if the company goes bankrupt, the shareholder’s personal assets can not be used to cover the corporations debts.
Nonprofits, unlike sole proprietorships or corporations, don’t have shareholders or owners, and they are considered separate legal entities in themselves similar to a corporation. So while a nonprofit can own assets and even take on debt, any wealth created is not shared with shareholders as there are none, nor paid out to an owner because there isn’t one. Rather the business entity is the asset or debt liability, so the Board of Directors or anyone associated with the nonprofit is not liable for any debt obligation, nor can they share in any revenues generated. If a nonprofit does go bankrupt and must be liquidated, all assets of the liquidation must be transferred or donated to a similar nonprofit and not spit among the people involved with the liquidating nonprofit.
The Concept of Buying a Nonprofit
The entire idea of buying a nonprofit is a complex and often misunderstood event. This is because nonprofits are usually set up with a mission to serve a specific charitable, educational, or social purpose and not to simply make a profit for their owners or shareholders like a for-profit company does. But that doesn’t mean there aren’t instances where individuals or entities may consider acquiring a nonprofit, and there are various reasons they may choose to do so as we’ll explore here.
One of the ways an entity may "buy" a nonprofit is by purchasing all of their hard and soft assets. This can include property, equipment, or intellectual property, of the nonprofit. This might be done to repurpose the assets for a different charitable mission, or to merge with an existing organization creating a larger and perhaps more geographical varied one.
Merger or Acquisition
Mergers or acquisitions although rare have been increasing in the nonprofit sector. Nonprofits can merge or be acquired by other nonprofits, usually with similar mission statements and goals, allowing for the transfer of control and assets from one organization to another. This allows the surviving organization to grow at a faster rate while acquiring a fully functional operation that is already set up and established.
Conversion to a For-Profit Entity
Although less common, a nonprofit can be converted into a for-profit entity. This process involves changing the organization's legal structure and mission to focus on generating profits. For example a pet charity may be acquired by a veterinarian hospital looking to grow. The charity’s hard assets and relationships within the pet community could prove to be very financially beneficial to the for-profit. Just be aware, changing a nonprofits legal status is filled with legalities and red tape that may make the cost and time involved to expensive a proposition.
Common Misconceptions Involving Buying a Nonprofit Business
Buying a nonprofit business can be a complex and unique process, and there are several common misconceptions that potential buyers should be aware of:
- Profit Motives: One of the biggest misconceptions is the assumption that buying a nonprofit business will result in some sort of personal financial gain by the person or business trying to acquire it. Even if the nonprofit has millions of dollars in the bank, this money must be used for charitable purposes and not paid out to individuals other than payroll. Even then, payrolls are public information and any payments made to a nonprofit’s Board of Directors or individuals by a nonprofit are monitored by the IRS and it’s possible to loose your nonprofit's tax exempt status if the IRS feels you are unduly or over compensating individuals.
- Complexity: Some buyers may mistakenly believe that acquiring a nonprofit is a much easier process than buying a regular for-profit business. In reality, nonprofit acquisitions often involve a slew of complex legal, regulatory, and financial considerations which makes any acquisition slow and costly. Then there is the red tape of being in compliance with federal and state nonprofit laws, maintaining the organization’s tax-exempt status, and any governance requirements laid out in the original mission statement.
- Asset Ownership: While a nonprofit's assets can be sold off or acquired, any revenue generated by the sale of a nonprofit's asset must still be used by the nonprofit to continue with its mission statement and goals. So even though an organization can sell a copier or old computer, the money collected must still be used within the nonprofit organization for charitable purposes. There are many different restrictions on how nonprofit assets can be used that have been set forth on both a federal and local governmental level. Under no circumstances can assets ever be liquidated for personal profit.
- Transition Process: While a mergers or acquisitions of a nonprofit is possible, the transition that will take place after everything is completed can often be tumultuous, especially if the acquiring entity isn’t in alignment as far as goals and mission statements. Then there are other considerations like a change in leadership, staff, or mission focus. It can take time and effort to integrate the new leadership and align the organization with the buyer's goals and vision, and it’s easy to loose donors and other support which invariably can negatively effect the effectiveness of the new organization.
- Tax-Exempt Status: Acquiring a nonprofit does not automatically grant the buyer tax-exempt status as this status can be revoked at any point during the process. The organization must continue to meet the requirements for maintaining tax-exempt status under all applicable laws and regulations both on the federal and local level. If for any reason the acquiring entity loses their tax exempt status during the acquisition, all assets must be liquidated under the non-profit tax code and they are not entitled to any of the revenues generated through liquidation.
- Due Diligence: Just like in for-profit acquisitions, thorough due diligence is crucial in nonprofit acquisitions. Buyers should carefully review the nonprofit's financial statements, contracts, legal obligations, and potential liabilities to fully understand what they are acquiring. All liabilities stay with the nonprofit regardless of how it’s acquired or by whom.
- Fundraising and Donor Relations: Buyers should not assume that existing donors and supporters will automatically continue their contributions after the acquisition, especially if you are looking to change the core focus or mission of the charity you’re taking over. Maintaining donor relationships and fundraising efforts may require significant effort, time and resources and should be considered before moving forward. The problem will often be multiplied when changes in staff and/or board members are also involved as many nonprofits work on personal relationships and not just by their name or mission alone.
- Legal and Regulatory Compliance: Nonprofit organizations are subject to major legal and compliance rules that make them unique. Specific laws and regulations, including those related to governance, financial reporting, and tax compliance must all be followed or you risk losing your tax exempt status.
- Community Impact: The acquisition of a nonprofit can have a significant impact on the community it serves. This can either be a positive or negative depending on how the community sees the changes you are making with the newly acquired organization. Similar to the donor situation above, potential changes can have severe negative impacts on the nonprofit’s ability to continue with its mission.
If you are serious about buying or acquiring a nonprofit for whatever reason, be sure to seek out professional guidance from attorneys, accountants, and nonprofit experts who can help navigate the complexities of nonprofit acquisitions and ensure compliance with all legal and ethical obligations before making any final decisions.
Mergers and Acquisitions in the Nonprofit World
With all the financial stress placed on nonprofits today, many are finding it difficult to stay in operation or fulfill their goals effectively due to the current economic downturn. M&As, although rare up to this point, are starting to look better to both healthy organizations as well as financially strapped ones. This is because, when used strategically, M&A can help nonprofits solve a host of issues that can have positive benefits for all involved.
The Model Nonprofit Corporation Act, Third Edition (MNCA),created by the American Bar Association allows the merger of non-profits as well as many state nonprofit corporation acts. These mergers are basically the same as for-profit mergers with obvious stipulations involved when it comes to their tax-exempt status under Section 501(c)(3) of the Internal Revenue Code (IRC).
Most often it is a financially healthy and strong nonprofit operating with the same basic goals and mission statement that swallows up a smaller less healthy one. This can benefit all involved by allowing the surviving nonprofit to grow to new geographical locations, while at the same time lowing their barriers to entry as the smaller charity has already established community relationships and support.
An M&A can also assist the smaller organization in becoming more efficient by lowing overhead, or using the charity’s assets more efficiently while also offering a much needed financial boost. For the surviving firm, this M&A can possibly expand on its services or skills or even inject new staff and volunteers into its organization.
Overall, M&As can be one way for an organization to buy or acquire a competing organization while creating a stronger and more financially stable business that can be more effective at achieving the mission statements and goals of all involved.
Is it possible to profit from buying a nonprofit?
No, it's not possible to profit from buying a nonprofit unless you change the nonprofit's legal status to a for-profit. Then it could be financially viable to acquire the nonprofit. Otherwise all revenue generated from any sale must still be used for charitable means.
What happens to the staff when a nonprofit is acquired?
The status of the staff of an acquired organization will depend on the surviving charity's needs. Although the surviving entity can hire and fire staff at will within applicable laws, most often businesses do not want to cause too much turmoil during a transition process. Furthermore, any employment and salary contracts between the acquired charity and staff are legally binding after the acquisition.
Can a for-profit company buy a nonprofit?
Yes, a for-profit can buy a nonprofit. This can either entail leaving the nonprofit as a charity and supporting said charity, or changing the charity's Section 501(c)(3) tax-exempt status to a for-profit one.
How are the assets of a nonprofit valued?
Assets of a nonprofit are valued just as any other businesses assets would be. The fair market value of its various assets, which can include cash, investments, real estate, equipment, intellectual property, and others would be calculated in order to determine its overall financial value.
Although technically you can't just go out and buy a nonprofit for personal use, there are still a few ways you can either absorb one, buy its physical assets or intellectual property, or change its legal status entirely. Each one has it positives and negatives and any acquisition of a nonprofit will come with its fair share of red tape and legalities, so if you're planning on buying a nonprofit for any reason, it really is best if you look to a professional tax law attorney and other professionals that will be able to guide you on the process.
If you plan on continuing running the organization after the acquisition, one aspect you need to be aware of is having a solid backbone for the operation. This means a software platform that is specifically created for nonprofits and all that is involved in running one efficiently. A platform like PayBee can dramatically cut costs as well as save you and your staff tons of hours on all sorts of tasks. Our powerful tool suite can help any charity run its operation more profitably and efficiently all from one workstation that can be accessed anywhere in the world. Try our free demo here to see all that we can do for you right now.