I am planning to start a homeschool nature-based co-op, where the parents will stay on-site, and we will meet 1-2 days per week. I believe we would be a for-profit organization. Is there some reason to choose non-profit status versus for-profit, in the case of a homeschool co-op? Any insight on how to get started would be very helpful. I have been a small-business owner for many years, but have never been in the non-profit administration world.
Shay
Shay,
Let’s start by addressing the word “co-op.” A homeschool co-op is a group of parents voluntarily cooperating to teach each others’ children. The word voluntarily is important. Co-ops depend on volunteer labor. So most co-ops are formed as nonprofit organizations. A business cannot have volunteers working for it. That’s a violation of the Fair Labor Standards Act. So if you run the group as your business, you cannot have volunteers. Everyone must get paid if they work for the business.
But maybe you meant “co-op” in a broader sense to mean a group of homeschoolers. Your business can sell a service to a group of homeschool families, but then it’s not a co-op and you should not call it a co-op t avoid confusing your customers.
There are many reasons why homeschool co-ops form and operate as nonprofit organizations rather than as businesses. I already explained the first reason: volunteers. Here’s are more reasons:
- Volunteers: a business cannot have volunteers working for it, but a nonprofit organization can use volunteer labor. So homeschool co-ops that use volunteer labor must be formed as nonprofit organizations.
- Ownership and Control: A nonprofit is not owned by anyone; a board of volunteers runs the group and decides everything including who to hire and what to pay them. The board can hire and fire any staff including the Executive Director (the head honcho) and hire another Executive Director. The board can also vote to remove other board members including any of the founders. So if you want to remain in control, then you may chose to operate this homeschool group as a business.
This issue of ownership and control is a big stumbling block for many. Some homeschool leaders want to remain in control so much that they run their groups as a business owned by them. That’s perfectly legitimate if set up that way legally. But then they miss out on tax benefits, donations, volunteer labor and the support of a board.
I had a phone consultation with two women, former teachers, who wanted to start a homeschool program. Their lawyer joined in on the call. They said they were considering forming as a nonprofit and wanted 501c3 status as an educational organization. I explained that as the founders, they would have to surrender control to a board. They could serve on the board as volunteers. If they wanted to be paid, they would no longer be voting members on the board. They didn’t like the sound of that. They politely but firmly said they wanted to remain in control. So I advised them to operate as a for-profit business, likely a partnership. The call ended after 5 minutes. I never got to explain the rest of this list! Ownership and control was the tipping point for them.
Many leaders, especially the founders, ask how they can remain in control and still lead a nonprofit group. I explain they cannot be in control, but they can influence who is on the board. Nonprofits can have the board replace itself with like-minded individuals. That keeps their vision and mission where they want it. This is mostly what they care about: keeping the vision and mission pure. - A team/board helps carry the responsibility: When you run a business, all the responsibility is on your shoulders. All the profit is yours as well, but you don’t have anyone else to help shoulder the responsibility. It’s all on you. I frequently have this conversation with homeschool leaders. I explain the liability they carry for things like record keeping, taxes, background checks, rental leases, safety, insurance, hiring, firing and paying workers. Here’s a list of liabilities and responsibilities you carry as a business owner using a Classical Conversations Director in this case: Liabilities CC Directors Carry.
In a nonprofit organization these responsibilities are carried by a group of people: the board. The workload is spread out. The treasurer handles the finances. The officers sign the leases. The board as a whole makes decisions. This is a huge benefit to a busy homeschool mother who doesn’t want to manage the group all by herself. - Tax exemption and tax deductible donations. Nonprofits who apply for 501(c)(3) tax exempt status with the IRS will be tax free on their surplus and can receive tax-deductible donations. Businesses cannot get tax exemption nor accept tax deductible donations. Any fundraisers held by the business belong to the owner and she must report it on her tax return as taxable income. So if you want and expect to get donation or grants, you should form as a nonprofit and appply for 501c3 tax exempt status, not a business.
- Profit motive. Nonprofits have a mission other than profit. The purpose of a homeschool nonprofit is primarily education, but faith-based homeschool groups have an religious purpose as well. For-profits are presumed to have profit as their primary motivation. While many business owners are also motivated by an educational or even religious purposes, at the end of the day the general public, your customers, and federal, state and local governments all assume you are in business to make a profit.
- Other perks including Use of property-tax-exempt facilities such as churches, parks and libraries. Most churches, public parks, and libraries limit the use of their buildings to nonprofit organizations, so they can avoid paying property tax. A bushiness should notify the church, park or library that they are not a nonprofit homeschool group, but are a business.
Does that help you sort though the differences between running a homeschool group as a nonprofit or as you for-profit business?
I would estimate that probably 80-90% of homeschool groups are run as nonprofit organizations, primarily for reasons # 1, 3, 4 and 6 (volunteers, teamwork, tax exemption, and use of tax-exempt property). For-profit business owners are swayed by reason # 2 (control) and # 5 (profit).
For more information on forming your homeschool group as a nonprofit my books may be very helpful particularly:
Homeschool Co-ops: How to Start Them, Run Them and Not Burn Out
The IRS and Your Homeschool Organization.
Carol Topp, CPA
HomeschoolCPA.com