Choosing your startup's structure.

Should your startup be for-profit or a non-profit? Here are three important steps to consider:

1. Clarify your primary objective: If your main goal is to maximize earnings for stakeholders, a for-profit model is more appropriate. If your mission is to create social impact, a non-profit may be the better choice. A common misconception is that non-profits are prohibited from making a profit. This is untrue. Non-profits can, and should, be profitable in order to sustain themselves. However, significant portions of the profits should be reinvested in the mission.

2. Analyze funding options: For-profit businesses can attract venture capital, issue stock, and often have greater access to loans. For-profit revenue models may have more reasonable assumptions (e.g. a for-profit gym could reasonably charge a membership fee of 100 dollars per month). Non-profits rely on grants, donations, and tax-exempt fundraising. Nonprofit revenue models may be more difficult to develop (e.g. a non-profit gym serving a low income community may have difficulty charging any membership fees).

3. Consider tax implications and regulatory requirements: A for-profit organization must file and pay corporate tax returns. If a for-profit organization elects to raise capital by becoming publicly traded, annual reports detailing the revenues and expenses must be made available to the public.

Non-profits enjoy tax exemptions on revenue related to their mission. Non-profits must pay a percentage of net investment income to the IRS. The tax is currently 1.39% of net investment income. Non-profits must file an annual 990 report with the IRS. The 990 is similar to a tax return and provides information regarding sources of revenue and expenses. The 990 is available to the public on request.

Preparing a 990 can be less time consuming than preparing an annual report. Preparing a 990 is sometimes less time consuming than preparing a corporate tax return.

Ultimately, the decision should align with your startup’s goals, financial strategy, and legal considerations. Some organizations even explore hybrid models, such as benefit corporations or social enterprises, which combine profit-making with a commitment to social good. Some organizations have a primarily for-profit structure with a non-profit division. Taking the time to carefully evaluate your startup’s mission and financial needs will help ensure a sustainable and impactful future.

These are just a few considerations. If you would like additional information, check out this article in Harvard Business Review:

Brumme C, Trelstad B. Should your startup be for-profit or nonprofit? Harvard Business Review, May-June 2023:136-145.

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