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

  • Ravi Agarwal

    We at engageSPARK also struggled with these issues and did an incredible amount of research into how to structure our not-for-profit social enterprise. We literally read dozens of articles, spoke to more than 15 lawyers (for 1 hour or more each!), and had countless internal discussions about these issues. After that, we put together a couple of blog posts to give our learnings back to the social enterprise community. The blog posts analyze the issues that social enterprises face in trying to figure out how to legally structure themselves. We tried to discuss our legal research in plain English.

    For those of you struggling with these questions, we recommend checking out our blog posts. We hope they help!

    Incorporating a Social Enterprise: A Simple Legal Guide http://engagespark.com/blog/incorporating-social-enterprise-simple-legal-guide/

    Social Enterprise: Existing Laws and a Not-So-Modest Proposal http://engagespark.com/blog/social-enterprise-existing-laws-not-so-modest-proposal/

  • Kevin Cahill

    With the plethora of charities that exist, many are dealing with the same issues and it begs the question, is competition in the charitable sector effective. Can competition be in fact unhealthy for the future of the charitable sector? Having intense competition leads to more funds being spent on marketing to differentiate yourself from the other charities. More and more effort gets spent justifying that you are doing a fantastic job rather than actually doing a fantastic job. – See more at: http://www.canadianlegacybuilder.ca/competition_unhealthy_charitable_sector

  • KeithBender

    3rd Comment in 3 years. Depending on the Complexity of a “ForProfit” Funding source being owned by someone dedicated but not obligated or by the Non Profit which means a very simple Business is preferable is a conversation that may never occur from within small Non Profits (under 1 million) .

    The Yin and Yang of these two alternatives are also extremes.
    This is why I am against the Executive Director/Founder being an Employee of the Non Profit. An LLC is probably the insulation needed when considering the “Governance Unknown” being what happens when you fill Board positions. When 25% of Revenue is paying the Salaries of the Executive Director(s) is is difficult to say that the Charity is or isn’t a Private Company.

    Keeping the Non Profit status and obtaining Revenue which is not “Deductible” could use some conversation since it appears simply filing another form in the IRS filing system and if need be even writing a Check. Simply an Overhead cost that is not subject to someones misinformed definition of what overhead is.

    An LLC doesn’t need the Formalized Board of Directors
    Governance but treating any “Business Revenue” as Business
    sure helps. Establishing the connection is when the identity of interests really needs crystal clear transparency. People bring a Philosophy that is in Conflict with Business and the next thing you know we are dealing with things we needed to know but never thought to ask in the vetting of a Board Candidate.

    I firmly believe that establishing a Fundraising conduit which
    is as simple as can be understood quickly is about as complicated as it should get. Unless the Executive Director/Founder understands the actions needed and the Board trusts their judgement.To sum it up it’s about Relationship and Convenience.
    The Focus of the Non Profit and the focus of the “business’ are
    both important. I think Teeter Totter balance makes a good visual.

    I resigned from being President from a nearly 1 million per year Charity which was basically a Government Contractor because sorting out the Relationships amid different beliefs about “Charitable Identity”did not align with the Founder. Too much
    to do about nothing boils it down. Providing a Fundraising System
    to interested Non Profits is How I choose to Fund my “Non Profit” concerns. I still believe in that Yin/Yang symbol.

    reach me at : Info@Oxy4Life.com