Should I Incorporate my New Org as a Nonprofit or For Profit?

I get asked this all the time by early-stage social entrepreneurs: “I have this prototype or start of a business or idea that could help drive social impact and I’m not sure how to incorporate it.

Cleaning up a few common misconceptions.

For-profits can receive donations; nonprofits can earn income.

There are some business models – such as purely philanthropic organizations or political entities – that need to incorporate as a nonprofit in the US and many other geographies. This isn’t about them. This is about delivering a product or service that benefits individuals. And while there are many tax and legal and accounting implications, I know strategy best and my advice is rooted there. 

Surprisingly to some, I always encourage early-stage social entrepreneurs to start off by developing an earned income, a for-profit organization in their initial business and financial models. Because here’s the thing with nonprofits without earned income: you’re always, always going to be fundraising. When you can earn revenue, you get the freedom of saying “for each unit of whatever we do, we’re going to generate this much revenue. Our costs to make that unit are somewhat known, so here’s our estimated margin.” 

You still need to market and sell the thing you do, but it’s a somewhat predictable financial ratio, and one that you can start testing pretty much immediately – just start selling. 

Proti or non profit organizayion?

How do non-profits work?

In a strictly donor-driven revenue model, that shifts. Now, while the unit of whatever you do may be known and the costs may be known, you have to go out and fundraise for that cost from an additional source. All of a sudden, you have two very, very distinct customer bases: those you serve and your donors or funders. 

Sometimes, especially when directly serving low-income populations, a pure and straightforward earned income model isn’t going to cut it. I was talking to a woman recently who was developing a new breast pump for a developing region; many customers there just won’t be able to pay for the pump’s cost. 

Some other business models to consider in this case.

Some iteration of one-for-one, for example, can work if done thoughtfully. For-profit companies, especially those that make technical products or are solving large scale problems, can also 100% get grants to cover things like R&D and startup costs, and ongoing sponsorship can often cover revenue gaps in for-profit social enterprises that can’t quite cut it solely with earned income. 

However, if it just doesn’t seem sustainable to charge for whatever you’re doing and have that cover a majority of costs, nonprofit incorporation makes sense. Remember, nonprofits can still earn income, and I see many daily that are doing so to diversify their revenue streams and mitigate risk. I used to work at an organization that was incorporated as a nonprofit but sold its services to schools. The payments from schools covered around 10% of our annual revenue needs; donations subsidized the rest. 

Be wary of the obvious choice.

I see social entrepreneurs often default to nonprofit incorporation because they’re afraid of sales. They don’t usually word it like this to me, but they say something to the extent of “it’s easier” or “we’re not sure anybody will actually pay for this.”

In a nonprofit, you’re still selling – just to funders. It’s not just like you need a good writer who can fill out grant applications. You have to market to funders and dig into articulating value propositions for them and sell to them to be successful.

And here’s another thing about sales: it’s feedback from the market. Consumers buy things they like and want and need. Now, in a nonprofit, you’re “selling” something that’s meant for Group A (the communities you’re serving or helping) to Group B (donors and funders). There’s a slippery slope that happens all too often of nonprofits giving in to feedback from funders about how to best serve communities, but it might not be something communities like and want and need; it’s something funders like and want and need. 

Planning strategy

This is where I always see nonprofits become really, really tricky to manage from a strategic and growth standpoint – and where many board issues arise as well. With two customer bases, business and financial modeling and strategic planning just get harder. Which is why I always recommend trying to figure out how to start off and sustain as a for-profit first, or at least have some semblance of earned income to not always be beholden to funders – as fantastic as many of them are. 

Obviously, there are many legal and tax implications as well, but from a strategic perspective, remember this bottom line:

Try to have a bottom line and make money first. You can always evolve from there!

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