WHEN STARTING UP any business, there are obviously countless things to consider: Do I need a business plan? Should I work from home or lease office space? How will I reach prospective customers? But when you’re launching a social enterprise, one more quandary needs to be added to the list: Do I set up shop as a nonprofit or a for-profit?
For Ned Tozun and his business partner Sam Goldman, who last year launched D.light Design, a New Delhi-based social venture that sells inexpensive lighting and power technologies in developing countries, that decision was pretty clear. “We felt like the only way to create a sustainable and scalable solution to the problem we aim to solve was via a commercial model,” Tozun says.
D.light Design founders Ned Tozun (pictured left) and Sam Goldman (pictured right) discuss the problems with using kerosene lamps. However, given D.light’s mission — that is, eradicating the use of polluting kerosene lanterns often used by people who don’t have regular access to electricity — most entrepreneurs would probably have chosen a different path.
After all, social enterprises traditionally lean toward the nonprofit model because of the perks they can receive from the business’s perceived “aura of goodness,” says William T. Hutton, a nonprofit attorney and longtime law professor in San Francisco. “Particularly in the educational sphere,” says Hutton, there’s “an innate suspicion that [nonprofits] are much more inclined to be selfless.” This perception, as well as the generous tax breaks that nonprofits typically provide to donors, make it significantly easier for social enterprises to raise funds and land government grants.
Of course, it isn’t just about the ability to reap charitable donations; there are plenty of other reasons to launch a nonprofit social enterprise. The confusing thing is there are just as many reasons — if not more — for social entrepreneurs to set up a for-profit business as well.
To help you figure out which model makes more sense, we weigh the pros and cons:
Whether you do business as a nonprofit or for-profit entity depends largely on your venture’s long-range picture and what you hope to accomplish, says Jesse Margolin, a tax attorney in New York specializing in corporate and nonprofit organizational law. “Most social ventures do not make much money,” he says, so entrepreneurs tend to be better off forming a nonprofit. By doing so, they’ll be in a better position to receive donations and other charitable dollars.
Under this status, however, any profits the company receives get reinvested back into the enterprise, not paid out to its owners. “What you give up by adopting a nonprofit designation,” says Hutton, the nonprofit attorney in San Francisco, “is a proprietor’s interest in growing equity.”
If, on the other hand, you think the business is a potentially money-making venture, then for-profit status is the best course. That way, says Hutton “the founders [and other owners] can realize gains from the success of the business.” If the company is incorporated, he says, the stakeholders can possibly receive stock and dividend payouts.