Missouri Press Association
Serving Missouri Newspapers Since 1867
Community newspapers are public institutions. But relatively recently, they operated only on a for-profit model. Converting from for-profit newspapers into nonprofit organizations could be a path for some local publishers trying to unlock revenues that can sustain the good work and public service of the paper.
The core idea is simple: rather than relying on advertising or subscriptions, a nonprofit news organization can seek charitable donations, foundation grants, and memberships. This model has been increasingly successful for both new digital outlets and legacy papers like The Salt Lake Tribune, which became the first U.S. metro daily to switch from for-profit to nonprofit status in 2019.
But the path isn’t for everyone. The process is doable, but it is not without complexities. This column will highlight some of the issues to consider as you explore the idea. But don’t take this as legal advice – everyone’s situation will be differently, and you will need to consult with attorneys and tax professionals during a transition if you decide to take the plunge.
There is no mechanism under Missouri law to simply convert your current entity (whether an LLC, corporation, or partnership) into a nonprofit. There are three general steps to take to accomplish the task. The third step – acquiring the federal 501(c)(3) status that allows for tax-deductible donations– will greatly influence your choices in the first two steps.
First, you must form a Missouri nonprofit. It is relatively simple to form under Missouri’s Chapter 355. You will need to form a board of directors with at least three members, and you will need three officers, a president, secretary and treasurer. You will need to write bylaws. You will need to register with the Missouri Secretary of State before soliciting donations. Importantly, the board of directors would essentially take over your duties and powers.
While you could likely work for the new nonprofit as an employee, the board members should probably be community members and should probably not include you or your relatives. The IRS has issued guidance that suggests it would be skeptical of the for-profit to nonprofit conversion where the nonprofit’s board was made up of the old owners.
The legal filings involved in the first step are not terribly difficult. But the lead up to this task is no small matter. You must assess whether you have the donor support you would need, the community buy-in and the funds to transition. Fortunately, there are two great resources to help you with this step. In Missouri, MoSourceLink is an organization that can help you get your nonprofit started. And then there is the tremendously helpful Institute for Nonprofit News, which provides a free and informative guide for conversion.
An important thing to remember too: The new nonprofit news service should not be a clone of your for-profit. The IRS nearly 50 years ago opined negatively regarding a nonprofit newspaper that did not operate any differently than a for-profit newspaper. So, you will need to define a new public purpose that matches the new charitable focus of your enterprise. The Institute for Nonprofit News cautions:
[Y]ou can’t create a nonprofit that simply replaces a for-profit newspaper with the same coverage, services and business models, and say it’s nonprofit because the ad-supported business model no longer works. That’s unlikely to justify nonprofit legal status or win you donors.
Nonprofit news organizations are called on to expand their mission to include more public-interest coverage, foster media literacy, hold events to encourage civic engagement, and provide educational and training opportunities for young and diverse voices.
Second, you would need to dissolve your for-profit entity and transfer any assets you wish to the nonprofit. The process of dissolving is controlled by statute and depends on what kind of entity you currently hold. Fortunately, it is rather straightforward. There are two points I want to make, though. The IRS prefers to see an arms-length transaction – so you would want the nonprofit to pay fair value for your paper’s assets. The other consideration is even more important: This is a one-way street.
Once you transfer the assets, you don’t own them anymore, and you likely will not be in charge anymore of the assets – the board of directors would be. It would be advisable to consult with an attorney regarding the best approach to transferring the assets.
Third, you pursue the federal 501(c)(3) status. The act of applying involves filing a Form 1023 with the IRS. But it is advisable to have an attorney help you do this. Your new nonprofit must not create a private benefit for anyone. Instead, its purposes must be limited to one of the exemptions provided in 501(c)(3). Once you achieve 501(c)(3) status, other limitations kick in. You will no longer be able to endorse candidates, and you will have to build a donor base where at least 1/3 of donated revenue comes from a broad swath of the public, not just a single donor.
Finally, you will still be able to pursue traditional newspaper revenues such as advertising and subscriptions, but those may wind up being taxable as a form of income the IRS calls Unrelated Business Income Tax (UBIT). This is an emerging area of tax law, and so obtaining the advice of tax professional would likely be wise.
So, transforming into a nonprofit is not a simple task. But is it worthwhile? It does appear like many newspapers are exploring the idea, and some are taking the dive. There are numerous available accounts – a great one is by the The Salt Lake Tribune. The mindset change – you’re a charity, you belong to the people, and you must fundraise – is major. But for many community papers, I cannot help but wonder if most of you are already doing most of the extra work of the nonprofit without the benefits.
