5 Bad Reasons to Choose a For-Profit Social Enterprise over Nonprofit

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July 30, 2014;Harvard Business Review Blogs

In a thoughtful blog written for HBR by Rich Leimsider of Echoing Green, he takes on a number of misconceptions people have that may lead them to believe that a for-profit social enterprise is better than a nonprofit. We have summarized those here:

  • Bad Reason #1: Only for-profits use “business discipline.” It is patently absurd to think that for-profits have a monopoly on business disciplines. There is no magic formula passed along with a business designation.
  • Bad Reason #2: Only for-profits can sell a product or service. Of course nonprofits can sell products. They sell cookies, tickets, human blood, and a host of other products. Once in a while, you may run into a restraint of trade snafu when there is a limited market in which you are competing head-to-head with businesses and they claim you have, by virtue of tax status, an unfair advantage, but these disputes have been relatively limited in the U.S.
  • Bad Reason #3: Only for-profits properly compensate employees. Stuff and nonsense. There are many over and underpaid people in both sectors.
  • Bad Reason #4: Only for-profits have a sustainable revenue model. Leimsider writes, “There are usually two intertwined misconceptions here. First, there is the earned income fallacy (see Bad Reason #2). If an earned income model is most sustainable for a particular company, they can pursue it as a nonprofit. The second misconception, however, is that philanthropic revenue is somehow less reliable than earned income. The official statistics show that more than 50% of start-up for-profit businesses fail within the first five years. Earned revenue can be highly variable.” 
  • Bad Reason #5: Nonprofits are “old-fashioned” and only for-profits earn respect in their sectors. Sigh. This seems just plain silly to us, but we know such thinking exists.

Leimsider also had three good reason to establish a social enterprise as a for-profit.

  • Good Reason #1: When local laws require it. Which domestically probably means never.
  • Good Reason #2: If equity investment is the best way to get start-up capital. Leimsider reminds us that this is a decision that should be made thoughtfully and with all options fully explored. “The trick here is not to lose sight that this will close off some philanthropic doors, and that equity investors will want to influence the business to get their money back.”
  • Good Reason #3: To send a signal to key partners or others about the role of for-profit markets. 

—Ruth McCambridge

  • Michael Wyland

    Good points. It would be interesting to look at the positives and negatives of establishing related for-profit and nonprofit entities, rather than having to choose one or the other. It’s not easy, and there are often significant conflict of interest issues to be overcome. However, establishing two related corporate structures can accomplish things like assuring investor/founder ownership of intellectual property while allowing for philanthropically-supported service delivery by the nonprofit using the for-profit’s intellectual property.

  • Momentum Communications Group

    This is an interesting list. We particularly agree with Bad Reason #5. Many non-profits are leaders in their fields and have proven to be socially innovative through tactics like crowdfunding.

  • John Ryerson

    Some people think business and capitalism are a law of nature – they are a human construct of course that is only limited by human creativity – we do best when we let innovation and creativity thrive

  • Rosemary Bayer

    Good Reason #4: You need to make product/service spending and market decisions fast. We are an L3C (Michigan low-profit limited liability company), ardentCause, creating and selling database and data analytics software products and services into the nonprofit market at a level where even small organizations can afford to track and even see their outcomes and impact. Tough to move fast enough as a nonprofit, really tough to get the price point low enough if you are all about profit.