“I Want to Make a Difference In the World! Should I Start a Social Enterprise or a Non-Profit?”
I get a lot of requests from clients and potential clients who say, “I want to make a difference in the world. I think I’m gonna start my own non-profit.” If you have had that thought, this article is for you and anyone else who wants to do good in business.
Starting a nonprofit is a worthy thing to want to do. It means that you’re more concerned about making a positive impact than you are about making a profit. And while I think it’s great that you want to make a positive impact, making money is important too. The decision to start a non-profit shouldn’t be solely motivated by your desire to do good. There are many facets to starting and running a non-profit organization that may, or may not, be aligned with your business concept or your ideas about your future. You can do good and make money, and you don’t need to run a non-profit to do so. Social enterprises are for-profit business that have a double bottom line: a financial one and a social impact one. I outline a few of the major differences between non-profits and social enterprises below so that you can start considering what type of business structure makes the most sense for you and your goals.
Non-profits: Per the IRS, 501(c)(3) eligible non-profit organizations exists for the benefit of others (the “public”), does not have private shareholders, and conducts business that qualifies as tax “exempt” including: human services, arts, education, research, religious groups, and other charitable services. In other words, non-profits can conduct many types of services but must meet certain qualifications to be eligible to apply for grants and other non-profit benefits. Also, the organizations earnings may not benefit private shareholders or an individual. In other words, no one is “profiting” from the business and the income of the organization.
Social Enterprise: A social enterprise, is a for-profit business that has a social impact goal embedded into its business outcome. Social enterprises can be stores, manufacturing companies, service-based businesses, educational institutions, beauty salons, restaurants…really, just about anything. Some social enterprises are for-profit companies whose products create a positive social impact outcome, for example, a solar panel company that has a duel goal of making money and improving the environment with its product. Other social enterprises designate portions of their profits to social impact initiatives, for example, a marketing company that designates 30% of its profits to fund a youth mentoring program that their employees participate in. What makes a business a social enterprise is that the businesses social impact goals are just as important as its financial goal to its owner and shareholders.
Non-profits: Non-profits do not have owners. Non-profits are independent corporations that are governed by a Board of Directors. The Board appoints, sets the salary for, and provides oversight of an Executive Director who leads the organization. With the guidance of the Executive Director, The Board helps set policies and votes on the strategic direction of the organization. If you start a non-profit you have no ownership or legal permanent oversight of that organization. Therefore, you can’t pass it down to your children, you can’t draw a salary from any of its sources of income after you leave, you can’t sell it. It isn’t your asset.
Social Enterprise: Since social enterprises are for-profit business they typically have an owner or multiple owners, and can give away equity in the company. The owner(s) of the business can make all final decisions about all aspects of the business including its products or services, and social impact goals. Often, social enterprises will have an advisory board that provides the owner(s) with guidance and feedback about how to meet its financial and social impact goals but they have no authority to make decisions for the business itself. A social enterprise can be passed down, you can draw income from the profits of the company even if you decided to step out of the day-to-day operations of the business, and can be sold.
Funding and Financial Considerations
Non-profits: The main funding sources for non-profits are private donors, fundraising initiatives, and public and private grants. This is how the organization pays for staff, program costs, overhead, etc. This means that the non-profit must do a lot of work just to maintain operations. Raising money for a sustainable non-profit is a full-time job, and sometimes requires a team of its own. Most non-profits hire fundraising directors and separate grant writer whose only jobs is to raise money. (Sidebar: Please do not offer to pay a grant writer after a grant has been awarded. This happens a lot and is not a good look. Grant writers should be paid for their time whether the agency gets the grant, or not. Let us know if you want to learn more about working with grant writer.) Because of the financial restrictions on non-profits all employees must be paid based on a pre-determined salary that The Board agrees on, which can be tricky if you don’t know what your funding will look like. Most of the time Executive Directors don’t draw a salary until the organization has raised enough money to pay them for the year.
Social Enterprise: Social Enterprises have a lot of options for how they fund their operations. Most business models are based on selling a product or service which eventually sustains the business. Also, because social enterprises are for-profit businesses they can also take different forms of investments and loans. In some cases, social enterprises can be eligible for grant funding from funders who are interested in supporting social entrepreneurs. Owners of social enterprises can be paid based on their earnings and can decided what to do with the profits of the company. Like, Executive Directors, often entrepreneurs won’t take a salary for themselves as they are growing their business, but that is completely up to the owner(s).
This is a lot of information to take in and it’s just the beginning! If you have questions about the difference between a non-profit and a social enterprise or are trying to figure out which one is for you, comment below and I’ll get back to!