(Photo by Flickr user mcflint, used under a Creative Commons license)
You have an idea that’s going to change the world. You’re socially minded with entrepreneurial drive. You need to formalize and incorporate your business.
How do you decide what type of business to become?
Impact is often equated with nonprofit status, but that’s not necessarily so — think internationally known companies like Patagonia, which is a benefit corporation, and TOMS Shoes, which is a socially minded for-profit.
First, some broad definitions. You need to know what the options are before you jump to a solution, and the options can get confusing because there is some overlap.
Nonprofit: These are organizations that put all revenue toward furthering their own missions, and get those commonly recognized associated tax benefits. A 501(c)3 designates the nonprofit as being charitable, but there is a plethora of 501(c) statuses up to 501(c)28. All they mean is that profits return to the organization, not to shareholders (because, in effect, the community is meant to be the shareholder, rather than individuals who capitalized the business).
Why You Would: Federal, state and local tax benefits for the organization and donors; discounts and various treatment considerations with service providers; ease in receiving foundation and certain grant program funding; social good brand association for clients, donors, employees and other supporters.
Why You Wouldn’t: Lengthy application process; costly and arduous maintenance requirements; restrictions on revenue and funding plans; additional complications for potential partnerships, acquisitions and mergers; lack of shareholder value and compensation opportunities.
From our Partners
Benefit corporations: These are relatively new kinds of incorporated for-profit organizations that many states are adding to their tax codes. Like nonprofits, there are additional filing and accounting requirements that must maintain the organization is conforming to “triple-bottom-line” business practices, which incorporate social and environmental impact. Find out in what states you can incorporate a benefit corporation here.
Why You Would: Some state and local tax benefits for the organization; some discounts and various treatment considerations; some supportive foundation and grant program funding; social good brand association for clients, donors, employees and other supporters.
Why You Wouldn’t: Additional filing and maintenance requirements; relatively new tax status creates some uncertainty.
Certified B Corps: Don’t let the similar names fool you; this a kind of private license that for-profit organizations can receive to have third-party validation of their commitment to social good while still focusing on profit. Social betterment is not directly tied to its products or services, but the company chooses to adhere to “rigorous standards of social and environmental performance, accountability and transparency.” The certification is offered by the nonprofit B Lab, which helped pass the first statewide benefit corporation legislation, in Maryland in 2010.
Why You Would: Some perks and partner benefits; social good brand association for clients, donors, employees and other supporters.
Why You Wouldn’t: Additional filing and maintenance requirements.
Social enterprise: This is a popular phrase that refers informally to for-profit organizations, which have traditional shareholders but balance a return of capital to those shareholders with its mission to benefit others. A profit should be made, and in fact developing a profit is still often very much the goal, but at the organization’s core there is a mission for social betterment. This is a descriptive term that can refer to many other types of organizations — including benefit corporations, B Corps and other mission-minded for profits. Confusingly enough, even some nonprofits that have a revenue strategy self-identify with the term. Collectively, calling your organization a Social Enterprise is a signal to clients, employees and others that mission is a prominent motivator of you. The point here is that no one can stop you from using the phrase to describe your organization because, unlike the rest, there is no authority over the term.
Why You Would: Social good brand association for clients, donors, employees and other supporters.
Why You Wouldn’t: It’s a somewhat vague phrase.
So, which one fits what you’re trying to do? Ask yourself:
- What is your first step?: If any of the above pathways give you the easiest headstart on your near-term goals, move forward. If you could test your work as a for-profit social enterprise, before pursuing the lengthy process of establishing a nonprofit, do it. But you need to keep your long-term plans in mind. Do you need to make a profit? It’s the simplest first question. If you don’t have investors or a need to have full control of your organization, you simply might not need to, and then the benefits of being a nonprofit will become more apparent.
- What works best for those you want to serve?: How can your community be served best? Ask directly. Immerse yourself in the community and find out what it needs. Some may get value from you being a nonprofit. Others may see value in a profit-making venture that can maximize flexibility or experimentation and might create wealth locally.
- How do you plan on making money?: Do you have a plan for bringing in your own revenue, or will rely on foundation funding? If your nonprofit organization were to make any income that is not mission-minded, you would be violating nonprofit laws, so think clearly about your path forward. If you want to sell a product and donate some money to a cause you care about, that would result in a different organizational structure than if you intend solely on relying on donors.
- Would you rather scale quickly or make large impact?: It’s hard to do both. If you’re looking to scale big and impact small, go for a for-profit model that might allow outside private funding. If you’re looking to scale small and impact big, go for philanthropic funding.
- What’s your competition doing?: Look them up on the Department of State’s Business and Charities page or GuideStar. If you’re thinking of relying on foundation funding, consider whether other, similar organizations will be competing with you for the same grants. If similar organizations are all going with a particular status, choose whether you benefit by being the same, or by going a different route.
- Then, speak to a professional: After you have a sense of your options and a plan for a direction forward, speak to your accountant. They’re the one who will have the most insight about the tax process. If they’re not familiar with these options, they might not be the best person for you. Look into Small Business Development Centers, which can help point you in the right direction.
Keep in mind that “nonprofit” is just a tax status. Likewise, other tax structures or certifications are simply a way of classifying your organization. The goal must be to maximize the positive impact you have on the community you’re serving. We’re entering an era in which the line between nonprofit and for-profit will continue to blur.
Depending on how you want to make impact, any of these classifications could work for you.