Why Putting Retirement Savings Into a Nonprofit Expecting to Take Money Out Later Is a Bad Idea

Discover why it’s best to put retirement funds in financial vehicles other than nonprofits, how to make money from a nonprofit, and find out about newer giving entities known as benefit corporations.

With retirement approaching, you might be looking for a new project into which to invest a portion of your savings. If you’ve got an entrepreneurial streak (or better yet, actual experience running a business) and are thinking this might be your opportunity to focus on making the world a better place, starting a nonprofit can seem appealing. It’s true that the funds you bring in could pay you a salary while you work for the cause.

But for someone nearing retirement age, there are important financial considerations beyond those related to starting and running the nonprofit: In particular, what happens when you’re ready to close it down, and might need some of your investment back?

Can You Transfer or Sell Assets That You’ve Put Into a Nonprofit Organization?

If you owned a for-profit business, you would most likely be able to transfer or sell your interest in it. The details and limitations would depend on any written agreements you’d entered into with other owners or lenders, as well as state or federal laws, including securities laws (those dealing with stocks, bonds, and other negotiable instruments).

By contrast, a charitable organization that is tax-exempt under Section 501(c)(3) of the Internal Revenue Code receives different treatment. Should a nonprofit organization sell assets, the proceeds must go to the nonprofit organization. For example, a nonprofit with extensive real estate might sell a portion of its property in order to raise funds for its charitable purpose instead of borrowing money.

An additional difference between a for-profit business and a nonprofit organization concerns dissolution. If a 501(c)(3) nonprofit is closing, specific laws will apply. Federal dissolution rules, generally speaking, require that when a nonprofit closes, any remaining assets are transferred to another tax-exempt nonprofit.

Also unlike what you may have experienced running a for-profit business, nonprofit organizations typically do not issue shares of stock. As such, you would not be able to sell or transfer any stock shares or receive a dividend—any money you put into the organization would be tied up there.

For an entrepreneur who wants to start a nonprofit as a retirement vehicle, these legal and structural limitations create greater risk than you might want to take on. It might be better to look into starting a traditional for-profit business or use traditional investing methods such as stocks, bonds, and so forth, or to look at the alternatives described below.

Is It Possible to Make Money From a Nonprofit Organization?

It is possible to make money through your investment and involvement with a nonprofit organization—most likely in the form of a salary. You might be able to receive a salary as a member of the board of directors, or possibly in another capacity, such as being employed as an officer of the organization or as a staff member.

The salary would need to conform to salaries of similar positions in similarly situated nonprofits. As a board member, you could not legally be paid an excessive salary or otherwise personally benefit from the nonprofit. Another consideration would be that members of a nonprofit board typically have term limits, so a long-term position might not be possible due to the structure of the organization.

However, receiving compensation as a board member could lead to legal issues related to receiving improper personal benefit from the nonprofit or to your losing the statutory immunity protections that are normally afforded to board members.

How Might You Do Good Without Starting a Nonprofit Organization?

Starting a benefit corporation might be a better choice for a retiring entrepreneur, depending on the nature and mission of the business you have in mind.

A benefit corporation is a socially minded form of corporate entity. Many states enacted statutes within the last several years to give entrepreneurs the ability to form a corporation that benefits the community. Benefit corporations, or similar entities, are now available in a majority of states.

A benefit corporation enables the pursuit of socially conscious decisions by eliminating the usual legal requirement that corporate decisions are singularly focused on profit and benefit shareholders. For example, a benefit corporation could pledge to donate a portion of its profits to a charitable cause. The law of each state differs, so check with a lawyer to learn more.

If you are considering forming a nonprofit organization, corporation, or other entity, consult with an experienced attorney to help you choose the right corporate form and to protect your rights. It might also be prudent to discuss your business idea with SCORE. A SCORE mentor might be able to offer suggestions and ideas to help you reach your business objectives and your life goals, such as retirement.

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