There are five key questions to ask if you are considering converting to for-profit, even before you begin exploring what form of for-profit might meet your needs:
(1) What circumstances make this conversion appropriate? For instance, you may want to change status because you seek investment funds to smooth fluctuating cash flow so that you can offer consistent services. Or the majority of your income derives from sales, and for-profit status may enable you to expand beyond "mission-related items."
(2) How should your non-profit's assets be valued? If your organization's assets are largely in the form of donor lists, you will be asset-poor when you convert because the donor lists may no longer be relevant. This may limit your ability to obtain loans or lines of credit despite your for-profit status.
(3) What should happen to the financial assets that remain after the conversion? If your organization has substantial capital or real estate assets acquired with tax exempt donor funds, will the donors object to them being acquired by a for-profit entity? Will you owe back taxes on them?
(4) Will for profit status actually cost you more in taxes than you will gain in access to investment or loans? If your organization holds significant real estate or derives significant sales or service income, you will be receiving substantial new tax bills. These may offset any advantages you gain from for-profit status.
(5) Will switching to for-profit status negatively or positively impact your image? This will depend on the area you work in, your clientele and your donors. Often, however, the label "non-profit" invests organizations with a level of respect and trust not accorded private sector firms.
A word of caution...
The assets of most nonprofits must stay in the nonprofit community which is dedicated to the same purpose for which they have been acquired. So there needs to be a proper valuation of the nonprofit asset and then a disgorging of those assets before the changeover to for-profit status. You can not expect to change status and retain the nonprofit assets. That's the third rail of nonprofit status: Improper private benefit... which is a severe IRS no-no!
Now, a 501(c)7 (which the IRS categorizes as a "recreational club organization") is a bit of a different animal from a 501(c)3. A 501(c)3 is that to which the "a word of caution" thing, above, pertains. I'm not sure, frankly, that the same rule applies to a 501(c)7. I've not worked too much with that type of non-profit.
Of course, the best thing to do is consult with an attorney.
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