[anolbom]

It's what you do with the surplus cash that counts. In the UK, not-for-profit organisations are allowed to keep a small surplus, but the majority must be re-invested in the company or donated to charitable causes. Check with a US accountant what the limit for retained surplus is, and stick to it! You can get tax breaks as a NFP organisation, but ideally you'd never need to use them, because you won't be making taxable profits ever. VAT will be the biggest issue, if your friend qualifies for it. NFPs get VAT relief, but of course it will depend on what the VAT is spent on/incurred in.

In the UK, I don't think there is a stipulation as you mentioned, but you'd need to ensure that the 'profits' from advertising are donated away, ideally many times a year, so you have an absolute minimum of taxable profit each year. The trouble is that much internet advertising income is from click-throughs: so it's really tough to calculate how much you'll make each month, and then donate the surplus to charities. I don't think the charities will get much the first year, because the cash paid for incorporation will lessen the potential donations, but if this business is large enough then it makes sense to declare it as NFP as soon as possible, and the charities will benefit more in the long run.

Good luck to your friend, and the charities he'll be supporting.