It doesn’t happen often but it does happen - nonprofit organizations become for-profit, which is weird and raises a lot of questions. OpenAI, a nonprofit organization founded in 2015 with the mission of ensuring that artificial intelligence (AI) serves the public, has recently been making headlines for its potential shift towards a for-profit model. With a current valuation of $29 billion (Microsoft Considers Investing $10 Billion In OpenAI, Maker Of ChatGPT: Here’s What It Means For Investors) , the company's potential transformation raises important questions about its original commitment to serving the public good. Though it is important to note that OpenAI is both an American artificial intelligence (AI) research laboratory consisting of the for-profit corporation OpenAI LP and its parent company, the non-profit OpenAI Inc.
It is an interesting topic to explore and one we don’t see talked about often so here are some interesting facts about the process. Also, a reminder that this isn’t legal advice! Here is a trusted list if your nonprofit is looking for smart legal support.
When a nonprofit organization becomes a for-profit, it typically means that the organization is changing its legal structure from a nonprofit corporation to a for-profit corporation. This can involve a variety of changes, including
The organization will no longer be tax-exempt, which means it will have to pay taxes on its income.
The organization will be able to generate profits, which can be distributed to shareholders or retained by the company.
The organization will be able to raise capital through the sale of stock or other securities.
The organization may be required to change its governance structure and may need to appoint a board of directors with experience in for-profit management.
It's also worth noting that, even if the organization changes its legal structure to become a for-profit, it may still operate with a social or environmental mission, but it will no longer be tax-exempt and will need to generate revenue to sustain its operations.
Additionally, becoming a for-profit may also change the way the organization is perceived by its donors, partners and the public, as it may be seen as less focused on its social mission, and more focused on making a profit. This could also affect the way the organization is regulated, as for-profit entities are subject to different laws and regulations than nonprofits.
It is important for any organization considering such a transition to carefully consider the potential consequences and to communicate transparently with all stakeholders about the reasons for, and implications of, the change.
Who gets the money of a purchase when a nonprofit becomes a for-profit?
Non-profits cannot be sold as they don't have owners, and are typically governed by a board of directors. The board is responsible for making decisions that are in the best interests of the organization and its mission but do not have any ownership rights or benefits.
When a nonprofit becomes a for-profit, the money generated from purchases typically goes towards the organization's operating expenses, such as staff salaries, rent, and marketing costs. Any profits that are generated after these expenses are paid can be distributed to shareholders as dividends, or they can be retained by the company to invest in growth or expansion. The distribution of profits in a for-profit organization is governed by the organization's bylaws and the laws of the state in which it is incorporated.
It's important to note that when a non-profit becomes a for-profit, it is not considered as dissolution, it is a legal change of structure and not subject to the same rules as dissolution. In the case of dissolution, federal law requires a tax-exempt charitable non-profit to distribute its remaining assets only to another tax-exempt organization or to the federal government or a state or local government for a public purpose. In the case of a non-profit becoming a for-profit, the assets belong to the for-profit organization, and the organization can use it as it wishes, subject to the laws and regulations that govern for-profit companies.
It's also important to note that, when a nonprofit becomes a for-profit, the organization may no longer be tax-exempt, meaning it will need to pay taxes on its income. This can also affect the distribution of profits, as some of the money generated from sales may need to be set aside to cover the organization's tax liability.
It's important to remember that the main goal of a for-profit organization is to generate a profit, while the main goal of a nonprofit is to serve a specific mission or cause. The transition from a nonprofit to for-profit may change the way the organization is perceived by the public and may change the way the organization is regulated, but it does not change the fact that a for-profit organization is a business and its main goal is to make a profit.
What happens when a nonprofit is dissolved?
Federal law requires a tax-exempt charitable nonprofit that is dissolving to distribute its remaining assets only to another tax-exempt organization, or to the federal government, or a state or local government, for a public purpose. This is known as the "doctrine of cy pres," which means "as near as possible." According to this doctrine, the assets must be distributed to an organization with a similar mission to the dissolving organization, or to a government entity for a public purpose. This requirement is in place to ensure that the assets of the dissolving organization continue to serve the public good, rather than being distributed for private gain.
Additionally, state laws may also dictate how a nonprofit should distribute its assets upon dissolution, and these laws may vary from state to state. Therefore, it's important for a nonprofit considering dissolution to consult with legal and financial experts to ensure compliance with federal and state laws.
It's also worth noting that, when a nonprofit becomes a for-profit, it is not considered as dissolution, it is a legal change of structure, and it does not require to distribute its assets as a dissolution would.
Can a for-profit corporation own a nonprofit?
A for-profit cannot technically own a nonprofit because a nonprofit is a distinct legal entity that is organized for a specific public or charitable purpose, and does not have any owners or shareholders. Nonprofits are governed by a board of directors, who are responsible for making decisions that are in the best interests of the organization and its mission.
However, a for-profit organization can set up a structure in which it has significant influence or control over a nonprofit organization. This can be done through a variety of means, such as:
Creating a subsidiary nonprofit: A for-profit can set up a separate nonprofit organization that is controlled by the for-profit through a board of directors that is composed mostly of individuals affiliated with the for-profit.
Sponsorship or funding: A for-profit can provide significant funding or sponsorship to a nonprofit, which can give the for-profit significant influence over the nonprofit's operations and decision-making.
Joint ventures: A for-profit and a nonprofit can collaborate on a project or program, which can give the for-profit significant influence over the nonprofit's operations and decision-making.
It's worth noting that, when a for-profit has significant influence or control over a nonprofit, it's important to ensure that the arrangement complies with applicable laws, including those regarding private inurement, private benefit, and corporate self-dealing. These laws are in place to prevent individuals or organizations from using nonprofits for their own financial gain, and to ensure that nonprofits are operated in the best interests of their mission and the public good.
A final reminder that this isn’t legal advice! Here is a trusted list if your nonprofit is looking for smart legal support.
