NON-PROFITS, 501(c)3s, AND PRIVATE FOUNDATIONS:
A SERIES OF SHORT ARTICLES AND Q & A ON WHAT IT MEANS, IF IT IS FOR YOU, WHAT’S INVOLVED IN BECOMING A NON-PROFIT PUBLISHER, AND, IF YOU ARE ALREADY, HOW TO OPERATE MORE PROFITABLY.
Have you ever had to directly compete with a non-profit organization who publishes similar materials to yours? Ever notice how they do catalog mailings at about HALF price you pay for them? Ever notice how they get donations and grants and all kinds of monies to compete with you, creating new materials, marketing, and offering products at discounts you could only dream about? Ever wonder where all these funds come from, and why YOU can’t get any? Ever wonder how they do it?
CLUE: Wonder about this… They don’t pay any income taxes on their profits, for starters. No IRS, No State, nada, zip, zero.
ANOTHER CLUE: As a Non-Profit Organization, they qualify for grants… yes, FREE MONEY, that you will NEVER qualify for or see as a for-profit publisher.
Ever wonder why you get up in the morning?
Seriously, I wrote this special series of articles to shed some light on the many questions I hear almost monthly about whether this or that publisher would be better of as a Non-Profit, or as a Private Foundation, or as something the people asking the questions aren’t even sure what it should be, but they know there is something out there that is better than what they are doing now.
And now, with the economy doing the old tank in the quicksand routine, it is more important than ever for you to explore ALL of your options to remain a viable publishing company, whether designated as a for-profit, or as some type of non-profit, or foundation. You do what you have to do.
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As a sidebar, I remember spending seventeen years owning a for-profit publishing company in a very, very non-profit niche of the industry. In fact, almost every customer we had thought we were a non-profit. Now, to be very honest, we acted consistently with being a non-profit, we offered huge discounts, we ran very low key… and unless someone specifically asked us if we were a non-profit, to which we always answered “No, we’re a for profit company, but that hasn’t happened yet.” We didn’t make a big fuss about our desire for profitability.
But, it didn’t help in many areas:
We still paid the full postal price for doing hundreds of thousands of catalog mailings… over double what our non-profit competitors were paying.
We still had to pay IRS and North Carolina during those years we earned profits… even 20% tax was 1,000% MORE than our non-profit competitors paid.
And we NEVER qualified for one dollar of grant money. I remember one specific non-profit publisher who shall remain nameless who got a $5 Million grant to develop new materials in one of our mutual subject areas. Imagine, $5 MIL to develop new products. Of course, once developed, and it came time to actually commercialize these materials, guess who they decided to let market them?
Themselves? You score 100% on this quiz!
In essence, the grant gave them $5 Mil in R & D money so they could save their other assets to do the marketing and printing and compete with us. Angry… I was furious at the whole arrangement, but in reading the grant, it was specifically for a 501(c)3 organization, and the licensing and marketing was to be given also to a 501(c)3 organization. They qualified on both counts, and earned huge profits on these materials. The profits weren’t taxable either so THAT money went into more marketing and more materials to compete with us.
The eventuality? We grew like mad, sold out, and here I am now, telling you all about the inequality of it all… despite everything. That said, YOU don’t have to struggle this way… there are options. And in these VERY uncertain times, they are worth at least reading about and considering.
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Non-Profit Doesn’t Have to Mean Unprofitable…
If you are a Non-Profit publisher and want to be profitable… you can.
Make as much money as you want or are able to earn.
The more you make, so you don’t start feeling guilty about it, the more that goes to the programs and services, and/or fulfilling the organization’s goals.
Thus, the more you make, the more good you can do.
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So, what IS all this… and what’s the difference among non-profit, not for profit, 501(c)3 organizations, foundations, public charities, and private foundations?
Well, put simply, the Non-Profit umbrella covers a great deal of territory. The portion of the IRS Code, numbered 501(c) and then a suffix from about 1 to 100, outlines all the various permutations of Non-Profit Organizations recognized by the IRS to fall under this category of operation.
Everything from church groups, civic groups, quasi political groups (but be careful here since most political groups don’t qualify), the local volunteer fire department, the Boy & Girl Scouts, to educational, cultural, and even quasi business operating companies, generally qualify.
In simplest language, you have the best chance to qualify if your purpose looks like a truly socially beneficial one, though, there is a wide variety of interpretation as to what that means. If your publishing is subject related, i.e. parenting, home improvements, exercise, model trains, almost anything… you could set up a non-profit organization for the appreciation and pursuit of a hobby, for the structuring of a free advice website for parenting, for a clearinghouse on home improvement techniques and green materials and the like… No, I am NOT suggesting you set up some sham or scam ‘front’… I am suggesting you take a completely NEW look at what you do and see what would ‘fit’ the circumstances, and, oddly enough, benefit your publishing efforts as well.
The differences among the various permutations of non-profit status result from the intricacies of the IRS laws. You are either a public charity or foundation, or a private charity or foundation. While there are some specific differences in treatment, the general things we are discussing here apply to all. The main choice point is whether or not at least 30% of your funding, that is, what monies keep the doors open, comes from public donations, or from private sources.
As an example the Gates Foundation may have started out as a private foundation with only the Gates’s monies… and when Mr. Buffet donated his billions, they could have then become a public foundation since more than 30% of all capital was now coming from the ‘public’… unrelated entities.
The specific structure of the non profit will likely be determined by circumstance and your assisting professionals, but the concept is all the same. Get that 501(c) designation and use it for the benefits available to you.
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So, what is the big deal for a publisher?
Why would I go from being a business to a non profit organization? It doesn’t sound right.
Well, there are many reasons. Your lack of desire to leave the business as part of your estate. The lack of heirs to accept your estate. Understanding that your company and its assets may have a much higher value as a donation than as a sold business (particularly appropriate if your company is past its prime). And/or having the realization that a basic salary is about all you can expect from your business moving forward. The fact that, in your field, there is research or assistance funding available for non-profits that is not available to for-profit businesses. Even the possibility of now having a legitimate hobby for your retirement for which you could be paid a small stipend. Or simply leaving a personal legacy in your field of interest. And, yes, it ISN’T for everyone.
Let’s go quickly through one scenario and see the benefits…
Let’s say you publish books, booklets, price lists, photo essays and other materials about antique and modern model trains. You have many years worth of inventory on hand, at cost say $200K worth, (poor decision making), and haven’t been turning more than a $20K profit in any year in the last ten, and it doesn’t look good for the future. You own the building you are in. Your personal interest and hobby is in antique model trains, though you have kept up some of your publications with information on current model trains. While there might be upwards of 100,000 or even a million model train enthusiasts, and ten or twenty groups or clubs to join to belong to the hobby… there is no centralized depository for model train information. A clearinghouse, a library, as you will. You have a substantial personal antique model train collection probably worth $100K, and no heirs to whom to bequeath the business, collection, or building.
With the building and the oversized inventory as negatives, as well as the fact you would not become part of a new owner’s plans for management, the business may be worth $50K-$100K. Hardly a profitable sale or even a happy one for an enthusiast like you. After spending forty years in the hobby, you would like to leave your mark if only in a helping way. In addition, if you sold out, you would just have enough to retire, but would have nothing you would like to do in retirement other than your trains.
You decide, with the help of qualified professionals, to form a private foundation, The American Model Train Enthusiasts Society. Initially, you will fund the endeavor with some seed money, your inventory, your publishing company, your building, your train collection, all your memorabilia, and what is now a very positive attitude about the direction of your life, knowing you are leaving a real legacy for those folks interested in your life hobby and life’s work.
The purpose of the Society will be to promote and preserve the Model Train in society… by providing information-data-printed-on the internet-in ebooks, a museum (your building and collection and memorabilia), a clearing house of information for questions and inquiries, and possibly a membership for fellow enthusiasts where you sponsor annual meetings/conventions, have speakers and writers adding to your website of knowledge regularly, answering questions, and the like. An honorable non-profit pursuit for your retirement.
Once public donations, memberships, and public funds (not including publishing sales) like grants reach 30% of operating income or costs, then you may decide to change to a public foundation.
Meanwhile, you have donated your inventory at $200K, your company at $50K, your building at another $100K, your collection at $100K, and memorabilia at another $50K. Altogether, you now have a personal tax deduction of $500,000. (Just to be straight, each piece has been twice independently appraised as required by the IRS.)
You may use this deduction up to an annual limit of 30% of your gross income, including spouse and investment and any other incomes you have. The unused portion may be carried forward until it is used up. Should you become a public foundation, or start out that way with a plan to have donations and membership funds of 30% of your budget/income, you can deduct up to 50% of your gross income each year until the entire amount is depleted. Thus, if your adjusted gross income, before itemized deductions, is $50,000., then you have an itemized donation of $25,000., reducing your effective tax to close to zero… for about ten years!
Meanwhile, the deed to your building is now transferred, for $1, to your Foundation. In most municipalities in the U.S., once so registered, you can apply for an exemption from real estate taxes, just like other non profit organizations like the Elks Hall, the local arena, churches, and the Girl Scouts building.
You can now charge a fee to view your museum… and as a non profit, schools and groups are far more likely to come and visit. You can give tours, sponsor events, and have meetings and presentations, with charges, all under the umbrella of your non profit. All the funds go ‘into the pot’ toward paying the bills of the Foundation and, as long as it is reasonable, a small salary for your efforts.
Other organizations are far more likely to support your efforts once you are a Non Profit… otherwise you are always seen skeptically as trying to make a buck from your largesse.
Final reality? You are able to pay yourself a salary, assuming your business was profitable before… the extra funds will pretty much ensure it now. You are exempt from real estate taxes, income taxes on your business, and, depending on whether you are at the 30% or 50% deduction level, your donation to the non-profit will pretty much exempt (or beautifully minimize) you from personal income tax for quite some time. And, whenever there are local, state or Federal programs for the local non profits to do this or that, you may put YOUR hand out now and collect some of those funds for your organization. (Imagine getting some of your tax money BACK for all you have given over the years!)
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OK… so what’s the catch? Why doesn’t everyone do it? It has to be hard, complicated, or illegal, or at least, very shady?
There IS one catch. The business, building, and other assets are no longer yours, but now belong to a non-profit organization that you only somewhat control. You can’t “sell off” the company or anything else (the building is a separate discussion, but you have to be somewhere) for your own gain.
Everyone doesn’t do it because IT ISN’T FOR EVERYONE. Let me repeat… IT ISN’T FOR EVERYONE. While I can rattle off a dozen situations for which this approach is appropriate, as I have above, I can rattle off three dozen for which it is NOT the right or best or even a consideration of an answer.
In 2009, I strongly recommended NO twice as often as I strongly recommended YES.
It isn’t hard or complicated once it is set up correctly. The set up can be very simple or very complex, but that’s why you have experienced consultants, accountants, and attorneys. You still need to keep records, you still need to have board meetings (just like a small corporation), and you still need to do business and work hard. You have to follow the rules just like any business, except you aren’t a tax paying business any more… you’re a tax beneficiary organization if you find the ways to get the tax breaks and cash grants available to others just like you.
Would Bill Gates have set up a private foundation if it weren’t legal? Of course it is not only legal, but at last count there were over 2,000,000 non-profits, 501c3s, and private foundations in existence. This is not some dodgy tax shelter, but an activity that has been going on since 1913… Mr. Rockefeller set up one of the first foundations alongside Mr. Carnegie’s. (Shady? Only if you’re located on the north side of the street.)
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Why Non Profits Don’t Often Succeed in Publishing as a Business Activity
While I could spend hours and pages on this topic… it is pretty straightforward. People involved in non profit organizations usually are experts or have a specific interest in, whatever that organization does. And unless it has something intrinsic to do with publishing, it is equally likely these folks aren’t publishing experts. No, these people are more likely to be focusing on population, ecology, war, local history, apples, wines, or preservation than understanding how to interpret printing RFQs.
Publishing is often the step sister of the organization’s activities… printing about what the group does or the positions it espouses, creating a local history book, using a coffee table book to solicit funds, or whatever the reason. The board meeting that suggests the creation of printed materials does not often also suggest the organization hire a publishing consultant or a printing broker to ensure the group gets the best deal, pricing, and final product.
The mandate from the board is always the same… make sure we don’t lose money if we’re trying to raise money… and don’t spend too much if it is material to be handed out freely. Otherwise, breakeven is a wonderful resolution for them… Or, better yet, one of the members is a printer and offers to handle the whole situation. Of course, when all is said and done, no one profits.
What these groups don’t understand is that publishing can be profitable… if you could run your company this way, wouldn’t you make money?…
** No Federal, State, or Local Income Taxes
** No Real Estate Taxes
** No payment of Sales Tax or Use Tax
** Bulk mailings at HALF the regular for profit postal rates
** FREE or reduced cost LABOR, as in volunteers, interns, and others
** Ability to solicit FREE funds from government and private sources
Well? Could you be profitable under these circumstances? I hope so!
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A Simple Example of a Change in Attitudes…
Let’s assume for a moment you are already a non-profit who publishes, yet you cannot seem to find a way to make it profitable… Here is what you are missing…
Imagine your publishing activities generate $50,000 a year in revenues. In the real world, a 15-20% profit would be reasonable. Yet, because you don’t focus on the publishing, or you don’t have the expertise, or you simply haven’t though about it as a profit center, you are lucky to break even.
Yet, with some simple changes in your attitude, both strategically and operationally, you COULD easily reach between a 35 and 40% net profit margin (according to the impact of the list of savings in the article prior).
In five years, without any increase in revenues, you would have created ONE HUNDRED THOUSAND DOLLARS in ‘profits’ that would be available to your organization to help it achieve its goals. Imagine improving your community, furthering your cause, or providing grants for research, because you actually have some operating funds. Now THAT is something worth changing your attitudes and getting focused on your publishing activities for.