What’s the difference between a for-profit and non-profit organization? Which is right for the venture you are embarking on?
Picking the right legal structure and classification for your organization is very important. It can impact everything you do and want to do in a huge way, and many diverse ways.
The right answer isn’t always obvious at first. In fact, you may be able to achieve what you first planned as a business, as a nonprofit. Or you may find it even better to organize your cause as a for-profit business.
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So, what are the differences between these classifications? How do you decide on the right one? Then, what are the steps for doing it, and going live?
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Here is the content that we will cover in this post. Let’s get started.
- 1. Types Of Legal Structures
- 2. For-Profit
- 3. Nonprofits
- 4. Not For Profit
- 5. Other And Hybrid Options
- 6. For-Profit Vs. Nonprofit: Which Is Right For You?
- 7. What Is Your Intent?
- 8. The Future Vision
- 9. Funding
- 10. How To Start Your Organization
- 11. Naming It
- 12. Create Your Brand Identity
- 13. Do Your Research
- 14. Build & Recruit Your Team
- 15. Create Your Plan & Pitch Deck
- 16. Create A Launch Plan
- 17. Start Raising Money
- 18. Summary
Types Of Legal Structures
Perhaps the most common structure is a for-profit business.
For-profit businesses can be structured as LLCs, S Corps, and C Corporations. They may also be partnerships and sole proprietorships.
The purpose of a for-profit business is to make a profit.
This comes with the legal responsibility for the owners and shareholders to vote and operate it in a way that prioritizes profits in the business. To grow the business’ revenues, value, and profitability. Even before individual shareholder or founder interests.
Founding owners may benefit from salaries, shares, bonuses, etc.
Non-profits are what we typically think about as charitable organizations.
Some of the most obvious nonprofit charities include the Red Cross and Salvation Army. Churches and religious organizations are often nonprofits too.
However, nonprofits can cover organizations across healthcare, pension funds, HOAs, and even the petroleum industry.
Nonprofits are typically linked to being 501c3 organizations. Which gives them tax exemptions and enables donors to gain tax deductions for their donations.
It is important to note that nonprofit status does not mean that founders and the organization do not take in a considerable amount of money. In fact, in some notorious cases, very few cents out of every dollar actually make it to the proclaimed beneficiaries and cause work.
Founders, executives, and workers can also be highly paid in nonprofits. According to the Economic Research Institute all of the top 10 paid CEOs of nonprofits earn from almost $8M per year to almost $16M per year in salary. They may also be given over $2M per year in ‘other pay’. This may include housing compensation, stipends or other benefits like vehicles, travel, and so on.
Not For Profit
A not-for-profit is an organization whose stated purpose is not to make a profit. It may be a charitable cause, public service, or group serving its members.
This does not mean that they do not make a profit, or that executives and workers aren’t well paid.
There are certainly well-meaning not-for-profits. There are others who may use this banner to make it sound like they are charitable organizations with pure intentions, but which are very much focused on using this classification in their advertising to make a lot of money from individual customers. Such as debt and finance-related companies.
Other And Hybrid Options
Over the past decade or so we’ve seen an increasing blurring of these lines between for-profit and non-profit, and new models.
Some charitable initiatives have been organized as businesses. Some very profitable ventures have been organized as nonprofits and not for profits.
More and more are also seeking to distinguish and separate themselves from the negative connotations which have arisen from so-called nonprofits which have not been very efficient in using their money to do good.
Now we have Charity Water which uses 100% of donations for their fieldwork bringing clean drinking water around the world. Others can donate specifically to help fund the office operations and pay.
The Chan Zuckerberg Initiative (named after Mark Zuckerberg’s wife) was organized as an LLC, despite its charitable mission. A move that may give the founders more control, while being able to voluntarily donate profits back into the organization.
Acumen came up with the concept of investing in socially good startups. Returns are then put back into the pot to invest in new companies, rather than being distributed to donor investors.
Then you have Warren Buffett who has pledged to give his stock in his for-profit business to charity.
Or the Gates, who leverage their huge for-profit business to fund their foundation.
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For-Profit Vs. Nonprofit: Which Is Right For You?
Which structure is right for your next venture? How to choose between for-profit and non-profit?
Here are several factors to base your decision on, and what you may want to consider before registering your organization.
What Is Your Intent?
Are you looking to launch and build the next hyper-growth company that raises and becomes valued at billions of dollars? Do you aspire to a very high level of personal income and wealth?
If so, then a for-profit business is probably the logical option.
If you are okay with a very modest income and average salary, with having an impact being your main why then going the nonprofit route could well be for you. You may not attract the big VC investors, but you could find donors who don’t expect repayment and returns.
If this is just a hobby or fun project that lets you be creative and do some good, then a not-for-profit could be a fit.
The Future Vision
What is the ultimate future vision for this?
Do you hope to sell it for billions one day? Is it something you hope will leave a financial benefit for your heirs or a specific cause?
Or do you want the mission to outlive you in the hands of caretakers who share your values, and just want to have a great impact on the world?
Every venture requires capital. How do you plan to fund yours?
As a nonprofit, you may raise donations from those seeking tax breaks, and who want to be a part of the mission.
Further, as a not-for-profit, you may hope to take in a mix of member funds, revenues from sales, or government money and incentives.
Then again, as a for-profit business, you open the doors to raising equity capital and utilizing debt financing to go really big, while bringing more sophisticated partners and stakeholders on board.
You might be surprised at some of the quirks. INcluding who can or will, or won’t fund certain types of organizations. Make sure your top targets will and can provide funding to the legal entity you are planning on establishing.
How To Start Your Organization
To formalize your venture and get started you need to register it in some way. For-profit and non-profit are just two of the ways to go.
The main two options for this are either to do it yourself online or use a lawyer who specializes in your type of organization.
While this can often be started online via a state website for a few hundred dollars, this is the very foundation of your venture. Your ability to recruit, raise money, and operate will be greatly regulated and dictated by these choices and the paperwork. It’s worth investing in getting it right.
Incorporating an LLC is one thing, and then there is filing for the right exemptions with the IRS if you want tax-exempt status as a nonprofit.
After this, you will request a taxpayer ID number or EIN from the IRS. This may be done online or via mail.
The jurisdiction you choose to headquarter and file in will also influence your credibility, attractiveness to investors, and the taxes you pay.
It is worth consulting an experienced advisor in your field to get this right from the start. To benefit from their eagle-eye perspective of the full journey.
To file and register you need to choose a name.
One of the most critical considerations here is to be sure that there is availability for the organization name, matching domain name, toll-free numbers, and social media handles.
Secure them all as soon as possible. For as long as possible.
Be sure you have researched to ensure there is no negative baggage and reputation attached to the name.
Create Your Brand Identity
In addition to your name, you will want to complete your brand identity with logos, slogans, and perhaps a style guide. One which includes the colors and fonts you will use.
Register trademarks as necessary.
Do Your Research
One of the most fatal mistakes founders make is to not complete their research before jumping in. This does not have to be a lengthy process, but it is critical. Surprisingly, many waste years of their life, and many dollars by failing to do the most basic Google searches.
Some basic questions to ask include:
- What competition is in the market?
- Is there really a gap that needs to be filled?
- What will your unique selling proposition be?
The key to the success of any for-profit or nonprofit venture is getting out there and talking to customers. Find out what the real problem to solve is. Define it. Make sure there is a market for it. Perhaps even get them to help you design the end product.
Build & Recruit Your Team
Whether you are for-profit or nonprofit, you won’t do this alone. You need a team. The sooner you begin building a world-class team the better.
This will include:
- The engineers or technical help to build it
Create Your Plan & Pitch Deck
Even if you are going not for profit you need a business plan. You need money coming in, to run smooth operations, and to cover the bills and salaries.
If you are a for-profit business, then everything rides on a successful business model.
Whether you are taking money from donors or giving equity to investors, you need a great pitch and presentation.
There is a lot of competition for all of these sources of funding today. Each may receive thousands of requests each week. You must stand out and be able to sell your venture as the one to fund and back with their dollars.
You do not have to try to invent the wheel from scratch here. Find proven pitch deck templates to customize and fill in the blanks with your data. Then start practicing your verbal pitch and live presentation.
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Create A Launch Plan
What is your timeline and countdown to going live with this?
Create a roadmap for your venture. What prep items need to be done before you can go live and officially launch? Who will do them? By what dates do they need to be completed? What money will need to be put in the bank to fund these steps?
Then start planning the lead-up to your launch. How will you generate buzz, and get buy-in, in advance to ensure this is a hit out of the gate?
Start Raising Money
Equipped with all the above it is time to get out there and start fundraising.
If you don’t have the right connections, be sure to find intermediaries who can make the right introductions for you.
The lines between for-profit and non-profit, and even not-for-profit organizations seem to be blurring. Each has its own pros and cons, and nuances. Understand these, and the limitations they may bring before registering yours.
Then be sure you have a strong brand, team, and plan to begin executing on before you get out there to raise funding. Understand the differences between for-profit and non-profit ventures.
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