For Profit Versus Nonprofit: How Do I Choose?

With the pronounced shift towards incorporating mission-based enterprises, a lot of first time social entrepreneurs are often unsure if they should start a for profit or nonprofit organization. To help with the process, we came up with some key questions you can consider to get a better idea of what entity structure would work best for the future of your business. Here are some things to think about:

Will Your Business Have Some Sort of Intellectual Property Associated with the Brand?
If yes, it might be better to go for profit structure because complicated ownership issues arise with nonprofit IP.

How Do You Plan on Generating Your Revenue? Will You Be Seeking Grants or Selling a Product/Service?
Although the landscape is changing for grants and for profit social enterprises (check out this article on the New IRS Rule Likely to Make Impact Investing Easier for more details), most foundations and grant makers presently only invest in nonprofit organizations.

Do You Anticipate Your Company Generating Profit? Do You Wish to Personally Benefit from this Profit?
If so, you probably want to be a for profit organization so you can personally take advantage of the profit. If you are a nonprofit organization, although you may salary officers of the organization, it has to be a reasonable amount to maintain nonprofit status (because of the laws of private inurement).

Is the Parent-Subsidiary Relationship Right for Your Business Model?
Another thing to think about is forming a parent-subsidiary relationship with a for profit and nonprofit organization. This is something you probably wouldn’t do until you have the parent entity well-established but a good thing to keep in the back of your mind

Do You Have the Internal Bandwidth to Prioritize Multiple Stakeholders?
This question is especially important when considering forming a nonprofit or a benefit corporation. Addressing the needs of multiple stakeholders (at a variety of levels) requires more internal support and collaboration than a strictly economic bottom line.

Who will Your Consumer Base Be?
Assessing your demographic can help you figure out how much (if at all) you can offer your services or product.

How Much Control Do You as a Founder Want to Keep?
Once you form a nonprofit, you relinquish a lot of your control in the organization. Unlike for profit enterprises, nonprofits do not have owners and founders do run the risk of being ousted from their own company by the Board of Directors.

These are only some of the general questions you want to ask yourself before officially incorporating your entity. Conversions from nonprofit to for profit (or vise-versa) can be tricky, so it’s great to weigh all your options. The attorneys at Sustainable Law Group specialize in business formation (including nonprofits) and can help you sort out the particulars of your business model! To contact our offices, call (310)883-7923 or email info@sustainable-lawyer.com.

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