We have worked on a number of projects recently that have involved up-front strategy and business planning. In each case, the idea originator has been challenged by the question: “Should your new organization be a nonprofit organization or a for profit organization?”
To begin, you actually have more options. Though there is some pushback, a number of organizations (including one of our clients, GlobalGiving) have found success with a hybrid model, blending aspects (and the legal/tax requirements) of both organization structures.
Options aside, the most important rule of thumb when choosing an organization structure is to focus on your organization’s mission and operations. To some this sounds fairly straightforward. To others, we would have been better off typing nothing at all. The more sophisticated and indirect your model, the more likely you are to fall in the latter bucket. To illustrate our point, we’ll provide an example.
One organization we are working with is focused on selling a retail product that ultimately serves a greater social purpose (educating a part of the population on particular social and environmental issues). Their natural inclination was to incorporate as a 501(c)(3) because the ultimate purpose of their activities was to support social and environmental causes. Unfortunately, such a decision would have placed them in fairly precarious funding situation.
Though their ultimate mission was based in positive social impact, their method of operating (selling a product) was more conducive to a traditional for profit model. It was much easier for this organization to find venture funding (from socially conscious investors looking for both a financial and a social return) because of the product orientation of their business model.
Restricting the organization to donations and grants would greatly limit the organizaiton’s ability to grow to scale. In addition, such funds would be fairly difficult to come by since the nature of the individual (or foundation’s) donation would result in an indirect outcome (assisting in the creation of a product that was sold to a person who was then educated about a social or environmental issue and inspired to take action). This runs completely counter to the current trend seen in most giving environments where individual donations are quantified for the donor in terms of direct impact (your $10 donation went to purchase a malaria net for one person in need).
The organization has decided to proceed as a “for profit social enterprise”. So when struggling with this kind of decision, we think it’s important to think about your ultimate mission, but also, how you plan on getting there. The means ultimately determine you ability to achieve your ends.
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