Social Enterprise: Making the Choice Between For-Profit and Nonprofit

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July 11 & 15, 2013; New York Times (Part 1, 2)

In a two-part series, readers of the New York Times were recently invited to reflect and comment on the decision-making process of a social entrepreneur: for-profit or nonprofit? ThinkImpact, operated by Saul Garlick, sends students for brief periods of time to live in developing nations and work with locals to create social businesses. After starting the venture in 2002 as a nonprofit, Garlick eventually came to reconsider the decision.

As the organization grew, Garlick found himself dealing with many of the issues nonprofits face every day: fundraising, outcomes measurement, transparency, staffing, and a to-do list which seemed to multiply with every $20 donor. ThinkImpact, like many nonprofits, relied heavily on charitable donations. The operation was not self-sustaining and the work seemed overwhelming. It was in danger of not making payroll. Garlick and his board believed there were three options:

  1. Continue with business as usual
  2. Close the nonprofit and start a for-profit company
  3. Keep the nonprofit and start a for-profit subsidiary

There were benefits and drawbacks to each option. Readers were asked on July 10th to comment on the blog and, a few days later, Garlick explained his decision.

He ultimately decided to turn ThinkImpact into a for-profit company because he 1) found willing investors and 2) wanted to dedicate his staff to products and services. While he valued nonprofits, he said he was skeptical of those nonprofits “perpetuated by a broken feedback loop. If your beneficiary is not a customer, they may never tell you what you are providing is unhelpful.”

Garlick also noted, “the nonprofit/for-profit debate is overestimated and really just about structure. I believe both structures can work, but they come with different requirements for how people prioritize their time…. The notion that nonprofits are the right—or even, better—vehicle for doing good in the world is no longer true.”

Garlick made what he felt was the best decision for ThinkImpact. For others reflecting on this decision, it is important to recognize a few key distinctions between nonprofits and for-profits.

  1. Ownership: For-profit companies have a clear owner: the founder(s) or, in the case of a publically traded company, the shareholders. Nobody owns a nonprofit. Nonprofit companies have a unique governance and regulatory structure that is designed so that the board is accountable to civil society: donors, funders, staff, clients, and larger community. It is not easy to manage the responsibilities of governance. It is, however, a sacred and powerful responsibility.
  2. Transparency: Nonprofits are subject to a myriad of accountability regulations and public trust concerns. Their 990 tax forms are public record. Independent evaluations are conducted by rating agencies such as BBB Wise Giving Alliance, Guidestar and Charity Navigator. Grant funds often require careful monitoring and evaluation. Thoughtful transparency requires staff and board time. It does, as Garlick implies, take time away from the programs and services; however, it also ensures that programs and services are up to standards and being delivered according to clients’ needs. It is a delicate, delicate balance.
  3. Profits: As a nonprofit company, net income must be reinvested into the mission. For-profit companies can distribute profits among owners and shareholders. Social businesses like ThinkImpact commit to a double bottom line: profit and social good. This double bottom line must be negotiated continuously, almost daily, to ensure that social motives don’t cripple the business model and that the drive for profit doesn’t supersede the social good.

Some say the distinction between for-profit and nonprofit is overrated. That may be the case. After all, ThinkImpact could have probably become self-sustaining without converting to a for-profit. However, when we look at the issues of ownership, transparency, and profits, we see that the distinction between nonprofit and for-profit is fraught with questions of democracy, responsibility, and the highly subjective concept of social good. These questions are at lifeblood of a strong, effective social sector – for-profit or nonprofit.—Jennifer Amanda Jones