Block Club Chicago and The PLUG are independent digital news organizations in the U.S. that produce mission-driven journalism, earn revenue from a mix of sources, including grants and memberships, and have a business plan to help them sustain and grow their operations.
But Block Club Chicago is a 501c3 nonprofit organization, while The PLUG is a for-profit LLC. And that shouldn’t be a surprise.
Nonprofit and for-profit news startups in the U.S. often have more similarities than differences — yet figuring out the right tax status for your business isn’t always a clear-cut decision.
In this post, I’ll share a few of the nuances that founders should consider before choosing a tax status, plus a way to soft launch your business before making a final decision.
To start, let’s dispel some myths.
Myth 1: Nonprofit news outlets are not businesses.
They are. Like any other business, they have paid staff and try to take in more money than they spend.
Myth 2: For-profit outlets only focus on making money.
Wrong. While this may be true for certain corporate media chains, many for-profit news outlets care deeply about their journalism and their impact in the community, especially if they’re independently owned and operated. So how do for-profit and nonprofit news businesses actually differ?
All nonprofit organizations exist explicitly to serve the public good. The owner of the nonprofit is the public, represented by the nonprofit board. This means:
- Key strategic decisions aren’t made by the publisher/founder, but rather by the board on behalf of the public.
- Nonprofits cannot be sold, so if they dissolve, their assets must be donated to another nonprofit.
- Because nonprofits serve the whole public, they cannot lobby for any specific candidate for elective office, and they can only do limited lobbying to support legislation directly related to their nonprofit mission.
A for-profit business, on the other hand, may choose to benefit the public but legally doesn’t need to do so.
Anyone or any group can own a for-profit — a single person, a partnership, a group of shareholders — and they can file their taxes as a sole proprietor, LLC, public benefit corporation, partnership, S Corp or co-op. (The vast majority of for-profit independent news businesses are LLCs. The Devil Strip was founded as a news co-op and The Mendocino Voice is planning to convert to a co-op. Berkeleyside was once a public benefit corporation, or B Corp, but recently converted to a nonprofit.)
At a for-profit, the owner(s) make all the decisions, and they can sell the for-profit at any time to any other entity. As a private company, the for-profit can endorse candidates, lobby, and do pretty much anything a person can do.
What matters to you and the community you’ll serve?
As a founder, are you willing to give up financial and legal control of the company you have founded in exchange for tax-exempt status and an explicit, permanent mandate to serve the public interest? (Tax exempt means your nonprofit’s net profits are exempt from federal income taxes.)
If the answer is yes, then consider becoming a nonprofit. However, as a nonprofit, you won’t be able to:
- sell your business
- have full control to make all the decisions for your company
- endorse candidates and legislation
But, depending on who your publication is serving, not having total legal decision-making control of your business can send a strong message to your community.
“To me, personally, going nonprofit conveyed some goodwill to the public that I thought would be much harder to demonstrate if we were a for-profit entity,” said Block Club Chicago’s Stephanie Lulay. “No one is getting rich off of Block Club, and no one could, because no one ‘owns’ Block Club.”
How Your Tax Status Matters to Others
Your tax status matters to foundations, investors, and other financial supporters, as well as to the Internal Revenue Service (IRS).
Foundations. Charitable grantmaking foundations generally are restricted to giving only to nonprofits, but for-profits may be eligible to apply with a fiscal sponsor (see below for more details about fiscal sponsorship).
Donors or investors. Private donors generally prefer to give to a nonprofit so they can get a charitable tax deduction. However, some people may prefer to invest in a potentially profitable business rather than donating to a nonprofit organization. These investors will need to have an “exit,” which means they need to be able to sell their share. To obtain investors, your organization probably needs to be for-profit.
The IRS and advertising. Until recently, receiving significant income from advertising meant your organization had to be for-profit. From 1983 to 2020, the IRS generally looked to see if your news business appeared “commercial.” The rule of thumb was that if more than 20% of your revenue was going to come from advertising, the IRS would likely prevent you from becoming a nonprofit. But the IRS now seems to be re-evaluating its position on revenue from advertising. If your organization will take significant income from advertising and you would prefer to have a nonprofit status, consult a tax attorney.
Once you know what you want as a founder, and you know how your business will earn money, you will have a clear path to a decision between nonprofit and for-profit.
If you still aren’t sure which way to go, get a fiscal sponsor.
Not sure yet which type of tax status is right for you? Whether you are just starting out, or have been in business for years, you can get a fiscal sponsor.
A fiscal sponsor is a 501c3 organization in good standing that takes donations on behalf of your project. Businesses of any tax status can use a fiscal sponsor.
A fiscal sponsor provides, at minimum, a letter of acknowledgement to donors affirming that their donation is tax-deductible, as well as bookkeeping for all donations running through them.
They charge a percentage of the donation for this service (usually a minimum of 5–10%), and many fiscal sponsors can provide additional services (like human resources) for an additional fee.
Ashley Woods Branch, founder of Detour Media LLC in Detroit, says this ends up being a good deal for her for-profit business.
“One point I’ve considered is that paying the 5% fee to my fiscal sponsor currently costs less than what I would pay myself in labor to run a nonprofit and to pay for more robust accounting services.”
The bottom line: Choose your tax status primarily based on operational questions, not financial sustainability ones.
As a for-profit business, you can receive tax-deductible donations through a fiscal sponsor, but you’ll have to pay that fiscal sponsor a fee. As a nonprofit business, you can sell advertising, but you have to consult a tax attorney and be careful how you frame it to potential customers.
The point is, being a nonprofit or for-profit news business generally does not preclude you from earning revenue in any particular way. In the long term, your financial sustainability is unlikely to come down to your tax status.
“As an industry, I think we need to do a better job communicating to startups that going nonprofit isn’t a business plan. Sure, you might be able to attract some grants if you’re lucky and mission-driven, but that’s a volatile revenue stream to rely on long-term,” Lulay said. “Subscriptions, memberships, small-scale donations, advertising/sponsorships, underwriting, events, merchandise are all part of our pie.”
Choosing whether to be a for-profit or a non profit business is a question of your goals as a founder. Know yourself, know your community, and you will know what kind of business you are in.
Jo Ellen Green Kaiser contributed this post to LION Publishers. A coach for the first round of LION’s GNI Startups Bootcamp, Jo Ellen spends her time consulting with independent nonprofit and for-profit news media. Schedule a free first consultation with her at https://calendly.com/jgksfconsulting/zoom-meeting
LION members: Join us on Thursday, Feb. 18 at noon PT / 3 p.m. ET to ask a lawyer your burning questions about fiscal sponsorship, tax laws, and the pros and cons of being a 501c3 nonprofit organization. RSVP here.
LION is looking for coaches with experience in financial management and operations
Coaches will work with independent news businesses to strengthen their systems for managing risk and uncertainty.
LION is hiring a Data Systems Associate
We’re looking for a full-time Data Systems Associate to support LION’s daily operations.
Apply for the 2022 LION Publishers Local Journalism Awards
Apply by July 10 for recognition at the fourth-annual LION Awards, celebrated at the Independent News Sustainability Summit.