The First Decision Social Entrepreneurs Have to Make

The advantages and Disadvantages of Organizing a For-Profit or Non-Profit Corporation

Q.   I have an idea for a new service company that will provide follow up counseling services and a sober living environment for teenagers and young adults who have completed a rehab program. Should I organize as a non-profit or a for-profit company? The entity will be revenue generating and employ several people.

A.   In the general media and in business schools lately, there has been a lot of attention paid to the emergence of a new kind of entrepreneur – a social entrepreneur. These enterprise builders seek to solve challenging social problems through innovative approaches, efficient business systems and skilled management, rather than on good will alone.

From your longer letter, it is clear that you share many of the best attributes of today's social entrepreneurs. You want to serve the public better, smarter and cheaper than other service providers.

Your question is a common one to startup entrepreneurs. Before you take too many steps forward you have to decide which type of business entity is best suited for your service mission. Normally, entrepreneurs can reach a decision with a fast phone call to their local lawyer and accountant. And then if entrepreneurs choose just about any for-profit structure, documents can be prepared and filed within a day.

But, here's the gotcha for non-profit startups. Organizing as a non-profit entity in any state doesn't mean that the entity will automatically be exempt from federal income taxes. You have to apply for the 501(c)(3) designation not to a state, but to the Internal Revenue Service.

It takes a certain level of sophistication to fill out required IRS applications plus non-profit entrepreneurs may have to wait several months before the IRS takes action on the application. Not all applicants are granted 501(c)(3) status.

There are two factors that should guide your decision: your personal priorities and the availability of startup capital.

At the heart of every entrepreneurial organization is a leader who has a bottomless commitment to see the enterprise through its darkest startup days. Non-profit oriented social entrepreneurs push their entities to provide services to as many people as possible. In contrast, traditional entrepreneurs are guided by a mission to maximize profits for the entity and its shareholders.

If you are willing to sacrifice profits in order to serve more recovering addicts, forego above-market compensation, or possibly provide some or all services on a pro bono basis, then a non-profit organization should get the nod. If you hope to one day build up your organization so that you can sell it for a lucrative reward, then favor a for-profit entity.

While I do appreciate that you can be devoted to your service goals in either type of entity, finding one or more sources of startup funding may ultimately drive your decision. Why do I know this? Because all ambitious entrepreneurs can't wait to get their ideas into the marketplace.

All types of startup funding are highly competitive to receive. In the non-profit world, new enterprises have to appeal to government agencies, foundations, wealthy individuals and social venture funds. Entities that can prove the highest levels of social performance outcomes tend to get the most funding support.

As a next step, make a list of potential funding sources for both types of business entities. Which list seems best suited to your goals? Which funding partners can get you going faster? Also, take time to research your competition. In both funding arenas, there is little interest in supporting "me too" services. You have to prove your ideas are different and better. You can do it!

Do you want to find reliable investors for your business? Write to Susan at susan@takecommand.org for great funding references and tips designed especially for startup entrepreneurs, sole proprietors and fast growth companies.

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