, Advice
08 August 2012

Non-Profit vs For-Profit - What Works for Startups?

The Non-Profit/For-Profit Spectrum
Answering the question "Should this startup be a non-profit?" is not black & white. There is a spectrum of options (full color - not even just grayscale!) and choosing the right structure for a social enterprise can help support the startup's scale and mission. Here are some options on that non-profit/for-profit scale:
 
 
L3C - Low-Profit Limited Liability
Unlike a standard LLC, the L3C has an explicit primary charitable mission and only a secondary profit concern. The L3C (low-profit limited liability company), a hybrid between a non-profit and for-profit corporation, can distribute post-tax profits to its owners. Prosperity Candle is an L3C.
 
Forbes published a nice piece fleshing out some of the differences.
 
Benefit Corporations and B Corps
B Corps are gaining popularity among organizations looking to solve social and environmental problems first, and turn a profit second. B Lab, a nonprofit organization, certifies B Corporations the same way TransFair certifies Fair Trade coffee or USGBC certifies LEED buildings.
 
According to the B Corp Site:
 
B Corps, unlike traditional businesses -
  1. Meet comprehensive and transparent social and environmental performance standards; 
  2. Meet higher legal accountability standards;
  3. Build business constituency for public policies that support sustainable business. 
There are subtle differences between benefit corporations and B Corps. It ultimately comes down to B Corporations is a certification by the B Lab, while benefit corporation is a legal status administered by the state. It's almost a squares and rectangles thing - B Corps are usually benefit corporations, but the reverse isn't always true.
 
So How Can a Startup Choose?
The panel left us with a few key pieces of advice to help determine structural paths for startups. Ultimately it depends on the entrepreneur, the company, the answes to the difficult questions: "Where do you want your money to come from?", "What do you want your company culture to look like", and "What's your timeline, really?" Criterion Venture's Structure Lab is a great resource to help work through those answers.
 
Passion, Dollars, and Passionate Dollars
If finding funding from sources that are as passionate about your cause as you are is your top priority, a for-profit structure might not be the best bet. Structures like the L3C or the B Corp will certainly limit the number of interested investors, but can also serve as a useful filter to find passionate dollars. If foundations look like the best source for funding, choosing a non-profit structure, or creating a non-profit arm might be helpful. Looking at where the money is likely to come from matters - if you build it, they won't always come!
 
Non-Profit Personnel in a For-Profit Company
There are many ways create a mission-focused culture. One way clear way to make an impact on culture is through hiring. Startups can do that by taking on people with a non-profit background to balance the for-profit types. In the words one panelist, "Hire A-Players and give them the chance to be unbelievable."
 
Slow-Ticking Clocks
Many entrepreneurs don't realize that the decision of structure can be delayed. For those thinking about creating a hybrid company, they can open the for-profit first, and then the non-profit arm later, or vice versa. However it's a great idea to meet with a lawyer early on because it is much easier for them to help you get tax exemption if they are there from the beginning (before incorporation).

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