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according to yahoo finance, openai is considering transforming from a non-profit organization to a for-profit company. if the chatgpt developer is approved, it can be more like a start-up company, and its financial resources will be very strong. sponsor microsoft ( msft ) will benefit greatly.

sarah kreps, director of the technology policy institute at cornell university's brooks school of public policy, said: any move that allows openai to focus on profitability may be beneficial to microsoft's investment in the company.

another observer said the reconfigured business structure would give microsoft the opportunity to renegotiate its already generous profit caps and remove the clause denying microsoft interest in the general artificial intelligence (gai) created by openai.

rose chan loui, founding executive director of the lowell milken center for philanthropy and nonprofits at the university of california, los angeles, said: openai made it clear that nonprofits will no longer have control, so that may mean that microsoft and other investors will have more control over openai. behavior has more say.

however,microsoft also faces potential obstacles as openai tries to shed its philanthropic trappings.

openai's huge valuation, labyrinth of for-profit subsidiaries, and potentially risky technology make its for-profit conversion legally and publicly complicated and could draw opposition from regulators.

openai investors see huge upside, though. on wednesday, the company announced it had raised about $6.6 billion in its latest funding round, valuing the company backed by sam altman at $157 billion. however, this valuation depends heavily on whether openai can become a for-profit entity.

whirlwind of change

openai is in the midst of a whirlwind of change.

the company is experiencing a slew of executive departures, most recently of chief technology officer mira murati. the company also faces stiff competition from rivals like google (goog, googl) and amazon (amzn)-backed anthropic.

reclassifying as a for-profit structure would be another major shift for openai, upending the way it was founded nearly a decade ago.

the company was founded in 2015 as openai inc. as a non-profit organization to pursue its mission of advancing human progress rather than pursuing profit.

openai's certificate of incorporation states in its organizational documents that the company was not formed for anyone's private gain while committing to keeping its technology open source for the benefit of the public.

that changed in 2019, when openai ceo sam altman and his team created a for-profit subsidiary to raise outside venture capital, including billions from microsoft.

here's how it's structured: the for-profit subsidiary, technically owned by a holding company owned by openai employees and investors, remains controlled by the nonprofit and its board of directors, while its largest backer (microsoft) has no board seats or voting rights .

the inherent tension between these two parts of the business led to a bitter boardroom conflict in 2023, when altman was ousted by the board and reappointed five days later.

microsoft has since taken a non-voting observer seat on openai's board of directors, but gave up that seat this year as both openai and microsoft came under heightened regulatory scrutiny.

the idea of ​​upending existing structures has piqued the interest of u.s. and european regulators and heightened ideological divisions among scientific and business leaders, who warn that machine learning technologies like those developed by openai should remain available to the public.

they argue that the technology poses an existential threat to humanity and should therefore be operated in a manner that is open to public scrutiny.

openai and microsoft are also part of an ongoing investigation by the u.s. federal trade commission, which is concerned that ai market consolidation is distorting innovation and undermining fair competition.

in addition, many people are calling on the california attorney general to investigate the legality of openai’s business structure. one of the calls came from elon musk, who co-founded openai with altman. he sued openai, altman and 21 openai subsidiaries.

musk said the defendants fraudulently promised that the $100 million he invested in openai would be used for public benefit.

since openai is granted tax-exempt status as a charitable organization, its transition to a for-profit organization may also attract the attention of the irs.

"are they getting fair market value?"

one unknown question is the extent to which microsoft will be able to profit directly from its investment.

by law, nonprofit organizations must use their assets solely for their stated charitable purposes. openai's assets, including all of its subsidiaries, may not be sold for less than fair market value.

gene takagi, head of neo legal group, said the question regulators want to confirm is whether they received fair market value for the asset at the time.

chan loui added that regulators will require openai to conduct a realistic valuation of its assets, including residual interests. she suspects that number may exceed openai's latest valuation.

"i think the most sensitive issue is probably how they take control away from nonprofits," she said. "i think their best way to avoid restructuring conflicts is to give nonprofit organizations adequate compensation," chen lu said.

"i think this is the best way to get the public, the states and the irs on their side."

as part of the transformation, openai is expected to register as a public benefit corporation.

rick alexander, a veteran corporate structuring attorney and founder of shareholders collective, said the entities are like traditional corporations but can be used more freely for good causes.

"it's a permissioned structure," alexander said.

other public benefit corporations include elon musk's xai, warby parker (wrby), allbirds (bird), lemonade (lmnd) and etsy (etsy).

based on the success of musk's xai, openai could benefit greatly from this shift. in may this year, xai raised $6 billion.

"this kind of transformation can quickly generate a lot of interest from investors," kreps said. "this is a capital-intensive industry, so anything openai does to attract investment will act as a positive feedback loop and accelerate its advantages."