Non-profit vs for-profit: Determining the best structure for your social enterprise
Do you have a passion for helping people? Have you had dreams of owning and operating your own business? Is the greater good more important to you than profits? If you answered yes to these questions, then you may be a social entrepreneur. Wikipedia defines Social Entrepreneurship as “an entrepreneurial venture that aims to achieve a particular social goal through positive externalities, in addition to profit”. By contrast a typical entrepreneur establishes a business and determines success by measuring profit and return. The social entrepreneur views the positive impact that they can have on society as the primary objective and not just earning a profit. Entrepreneurial endeavours with a social mandate are typically associated with the non-profit sector. How then do you determine, if your venture should be a non-profit or for-profit? Following are five things that you should consider when trying determining the structure of your social enterprise:
1. What’s in a name?: One of the key differences between a non-profit and for-profit organisation, as the name alludes to, is that non-profits don’t typically make profits that they would pay to shareholders. The organisation can be profitable; however all profits must be used for the operation (i.e. salaries, rent, other administrative expenses) of the organisation.
2. Property rules: Any property or other assets of the organisation does not belong to the owners of the organisation but instead is redistributed and used specifically for the purpose of advancing the non-profit’s social mission and objectives. If the organisation goes out of business, any assets must be given to another non-profit not distributed amongst shareholders.
3. Who’s the boss? A non-profit organisation is typically managed by a board of directors that share the vision and mission of the organization and whose primary objective is to advance the goals of the organisation. If you are a control freak and think you should have the ultimate say in your social enterprise then think twice about establishing a non-profit as the board operates as a collective.
Show me the money: A non-profit organisation typically relies on fundraising to raise capital for its operation. This can include, but not be limited to applying for grants, asking for donations from individuals, corporate and government organisations. While you may think free money is good money, there is a lot of work that goes into trying to get people to buy in to your cause and sometimes, donations are not sufficient enough to maintain the cost of operating your social enterprise. What then is the alternative?
5. The best of both worlds: If you are still undecided on what structure to pick for your social enterprise because you need earn revenue in order to finance your non-profit venture, then you may want to consider establishing a “hybrid” organisation a non-profit with a for-profit arm. In some instances the non-profit is the parent company and the for-profit becomes a subsidiary or vice-versa. Although this model can address some of the issues related to financing the non-profit, do not enter into this arrangement lightly as it will require more management with separate boards and separate accounting.
Whatever decision you make regarding the structure of your organisation, we encourage you to seek guidance from a lawyer or other professional service provider who can help to guide you. For more information on starting a non-profit, check out the Centre of Philanthropy’s website at www.centreonphilanthropy.com. To find more information on starting a for profit venture visit www.bedc.bm.
Jamillah Lodge is a Business Development Officer for Bermuda Economic Development Corporation. She specialises in providing aspiring and existing entrepreneurs with business development advice and loan guarantee assistance. In addition, she manages the marketing and communications plan for the Corporation and oversees the development of a mentorship and youth entrepreneurship programme. She has a degree in Business Administration with a concentration in Marketing. The opinions expressed in this article are those of the writer and should serve a general guide and should not be considered as replacement advice from a lawyer, accountant or other professional service provider. Readers should consult with the appropriate professionals as necessary.
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