Nonprofit or Business: How to Decide What's Right for Your Next Venture
When you have an inkling of a great idea, this calls on you to think long run about your business when it comes to structure. How you outline your business structure has major implications for funding sources, operations, and management options. When there’s a service-based impact of what you intend to do in the business, this means you might be able to pursue either the business route or the nonprofit route. They’re very different, so you want to have a good idea from the outset which makes more sense for your personal goals.
The Differences Between a For-Profit Business and a Nonprofit
These two organizations might have similar structures in terms of teams, software used, or even goals set. But nonprofits function differently because they are governed by a board of directors. They also must meet stringent financial requirements if they have received 501(c)3 status from the government, and they’ll file taxes differently. A business will be taxed based on its structure and formation, but a nonprofit doesn’t pay taxes when it has the appropriate classification.
Likewise, while there might be some purpose-related crossover, for the most part, a business exists to generate profits for the owner and/or employees or investors, but a nonprofit does not exist to create profits. It instead exists to serve its purpose, like environmental conservation or helping a particular population. Nonprofits serve society at their core and often strive to meet their budgetary needs in terms of revenue and income, but are not trying to scale with the concept of bringing in greater profits. Instead, they’ll focus on making a bigger impact in other ways as they scale.
When you’re trying to decide what’s best for you, consider the following issues so that you can feel confident in the decision you elect for your organization.
How Much Control Do You Want?
A solopreneur or startup founder has a lot of say in what the company looks like, how fast it grows, and what money gets spent and when. The same is not true for a nonprofit founder when they report to a board. Most decisions get handed over to the board for a vote. The board might meet as frequently as once a month or as little as once a quarter, but it’s their role to determine what things look like and what decisions get made. If you’re very entrepreneurial and want to maintain ownership over most choices, it could get frustrating to operate in this environment.
Another key thing here is that you might be starting this company to accomplish a social good and create a legacy that lives on beyond you. In these situations, having so much say over what happens on a daily basis may not be that important to you. In that case, a nonprofit might perfectly suit your needs.
Where Do You Want Funding From?
Plenty of pitch competitions are for businesses only, not nonprofits. These startup and venture capital funding sources are very clear about wanting to support company founders, meaning that in most cases, a nonprofit wouldn’t be able to receive funding from these places. If an investor is hoping to make their money back and is banking on the company having a successful financial future, it’s not surprising they’d be looking for a for-profit business with scaling intentions rather than a nonprofit that is usually governed by a limited budget. However, always read the fine print since some pitch competitions have opened the door for nonprofits as well.
On the other hand, properly classified nonprofits have the ability to get grant funding from the most sources. This is because many federal, public, and private grant programs all require that an organization requesting funding do so only when they have IRS-approved 501(c)3 status.
When it comes to making the final decision about what’s right for your organization, weigh the pros and cons of each side. Which structure will better serve these goals over the long run? Are you potentially blocking yourself from a major funding source by choosing one route over the other?
If in doubt, schedule conversations with colleagues who work in both for-profit and non-profit companies to get a sense of their day-to-day life.