On Sept. 25, Reuters reported that ChatGPT developer OpenAI is working on a plan to restructure its core business from no-profit to for-profit.
The move has received controversial feedback from the community, with billionaire entrepreneur Elon Musk questioning the legality of such a business transformation.
Musk took to X on Sept. 26 to argue that one “can’t just convert a nonprofit into a for-profit,” adding that such a conversion is “illegal.” However, that’s not the case, according to several sources.
Source: Elon Musk
California laws allow a nonprofit to convert to a “for-profit stock corporation” but not an LLC
OpenAI was founded as a nonprofit in December 2015 in San Francisco by a big group of tech luminaries, including Sam Altman, X owner Musk, Ilya Sutskever, Greg Brockman, Trevor Blackwell and many others.
Under California law, California nonprofit corporations cannot change the entity type from a nonprofit corporation to a limited liability company (LLC), according to the official website of the California Franchise Tax Board.
OpenAI’s co-founders. Source: Perplexity.ai
However, nonprofit corporations can amend or restate their incorporation articles to become a for-profit stock corporation. “Once the nonprofit corporation becomes a stock corporation, the corporation can follow the procedures outlined in Corporations Code Sections 1150 through 1160 to convert into an LLC,” the website reads.
According to attorneys like Jeremy Hogan, OpenAI’s potential transformation into a for-profit corporation is not impossible, but it likely won’t be easy.
“Actually, it’s possible, just a pain in the butt,” Hogan said in response to Musk’s post suggesting that OpenAI’s move to for-profit would be illegal.
Source: Jeremy Hogan
OpenAI’s ChatGPT gives a similar response regarding its developer’s potential restructuring.
“Converting a nonprofit organization to a for-profit entity is not inherently illegal,” the chatbot said, adding that it involves a complex process that must comply with various legal and regulatory requirements, including tax implications, shareholder approval and others.
What is known about OpenAI’s potential conversion to for-profit?
Multiple reports, citing anonymous sources, suggested that OpenAI is considering changing its business structure to a for-profit corporation, but the company has apparently yet to announce the official decision.
“We remain focused on building AI that benefits everyone, and we’re working with our board to ensure that we’re best positioned to succeed in our mission. The nonprofit is core to our mission and will continue to exist,” OpenAI told Reuters on Sept. 26.
OpenAI previously publicly claimed that the firm and Musk discussed a for-profit structure in order to further its mission as early as March 2024, writing the following:
“As we discussed a for-profit structure in order to further the mission, Elon wanted us to merge with Tesla or he wanted full control. Elon left OpenAI, saying there needed to be a relevant competitor to Google/DeepMind and that he was going to do it himself.”
According to online reports, OpenAI’s board is currently considering a decision that would change OpenAI into a public benefit corporation. The company is said to already have a for-profit division, where most of its employees work, and a nonprofit board of directors controls it.
As part of the transition, OpenAI CEO Altman would receive equity for the first time in the for-profit company, estimated to be worth $150 billion after the restructuring, according to Reuters.
Why is Elon Musk so salty about OpenAI’s move to for-profit?
As previously reported, Musk sued OpenAI and Altman in February 2024, claiming that the ChatGPT creator deviated from its original mission to develop its large language models for the “benefit of humanity, not profit.”
After dropping the lawsuit in June, Musk renewed the complaint in August 2024, once again accusing the firm of violating its promises to operate as a nonprofit.
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One must take Musk’s assessment of the legality of OpenAI moving from nonprofit to for-profit “with more than a grain of salt,” according to Lesperance and Associates founder David Lesperance.
“Elon Musk views OpenAI as a competitor,” Lesperance said in a statement to Cointelegraph, adding that OpenAI had already secured a strong legal opinion from top specialist lawyers on their move to a for-profit corporation. He added:
“With such a large market cap, it is quite probable that Open AI will engage in a future IPO, so that structure will undoubtedly also contemplate future securities disclosures and filings.”
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