Thursday, September 18, 2008

The Non-Profit/ For-Profit Decision

A major part of a business plan is defining the market for your service or product and then determining how you will provide it to your customer. But if you are starting a business to serve disadvantaged communities there is one question you must resolve before all the others: will you structure your business as a for-profit or a non-profit?

A few years ago, the structure question involved dealing with two very different entities. But in the last few years, the two organizational structures have begun to move towards what some writers have called a blending. Today, there are for-profits that are organized around social missions and there are non-profits that are running very large and profitable businesses. And for Christ-following entrepreneurs, whether they are running a faith venture or not, the distinction almost becomes non-existent. If all resources are God’s resources then the Christian business owner is just a steward of what is really God’s. They need to prayerfully seek God’s will for any profits that the business enjoys. In the end, the question is primarily an organizational one for faith ventures: what structure works best for what you are trying to accomplish?

When you talk about entities organized around social missions, the traditional organization structure has primarily been to incorporate as a 501c3 non-profit. This is probably the cleanest structure for ensuring that the organization remains true to its mission. Unlike with a for-profit, there is very little chance that the entity will change owners and stop serving its social purpose. In addition, a non-profit business usually enjoys the benefit of not having to pay taxes on profits as long as the business is closely related to the mission. A non-profit business can offer donors tax deductions for donations of product or money. This can be a valuable source of start-up funds or of resources to cover the extra-costs associated with the entity’s social mission.

Even with these advantages, there are some significant drawbacks to the non-profit model. It is difficult to obtain loans from banks because of the nature that no one person owns the business. This can be a significant problem to finding the capital to expand a thriving faith venture. In addition, it is difficult to structure ways for individuals to make traditional investments in the business. The lack of one owner can also sometimes make the faith venture less efficient than in a for-profit where someone actually owns the enterprise. These four reasons are why some faith ventures operate as for-profits. They seek the ability to scale the business through investment and believe that real ownership creates efficiency and business success. This happens whether a non-profit organization or an individual owns the for-profit business. The downside is that the business must pay taxes on profits and the business cannot offer tax deductions for donations.

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