To B, or Not-For-Profit To Be
Once you’ve decided you want to be a part of making an impact, you’ve got a lot of choices in front of you. Do you volunteer your time, donate money, seek out a career working for a great cause, launch your own organization or business with a mission, or all of the above?
This article was written by featured writer Amber Smith.
For you self-starters determined to kick-off your own social impact projects, you’ve got several more considerations to make. What is the ultimate problem you aim to solve? Who is already doing work to solve it? What are the gaps or areas not yet being addressed, and what special skills or talents do you uniquely bring to the table to move the needle? And, vitally, what is your model for growing and sustaining your efforts?
The Nonprofit Sector is society’s go-to make-a-difference vehicle. Charitable organizations are often the first things we think of when we consider the best ways we can change the world. For many, the notion of “giving back” conjures up scenes typically relating to these organizations: Folks ladling out soup at a soup kitchen, dropping coins into red buckets at Christmas, marching with fellow activists in the streets for a cause, or attending galas and writing big checks.
But the truth is, there are many models for making an impact.
In a world with rapidly changing landscapes, complex social problems, and a frustrating lack of funding available for causes — especially those who need to try innovative but risky new solutions to combat global challenges— some models for social impact may be more successful than others.
Where a nonprofit’s ability to raise funds will be constrained by certain governmental policies and public or donor perception about overhead, a B Corp might be able to generate the funds it needs through a more flexible, uninhibited sale of goods or services; where a B Corp might face obstacles with public trust, society’s general goodwill towards nonprofits will be an automatic perk of the model.
How do you know which model — Nonprofit or B Corp — is right for your venture? Let’s explore.
Get that Nonprofit Status: Pros and Cons
A common misconception is that nonprofit literally means “no profit”, that nonprofits cannot generate revenue; this is not at all accurate. Rather, organizations do (and must, to survive and operate) generate funds and revenue, but spend those funds on advancing its cause rather than distributing income to shareholders like a for-profit business would.
While many think of nonprofits as public charities, or 501c3 tax-exempt organizations, the fact is there are a number of different types of nonprofits by legal definition. A “nonprofit” status means only that the federal government has exempted that organization from some income taxes, but not all nonprofits are charities. Nonprofits can include chambers of commerce, places of faith, political groups, and once upon a time, even the NFL. For the sake of this comparison between nonprofits and social enterprises, however, I’ll be discussing the most commonly thought of type of nonprofit — the 501c3 tax-exempt public charity — the status your favorite causes most likely enjoy.
If you’re thinking of going the nonprofit route, there are a few key things to think through:
Pro: Tax benefits and the halo effect
As a general rule, nonprofits benefit from the “halo effect”, a public perception that because an organization is a charity, that it is a positive force deserving praise. This overall goodwill automatically afforded nonprofits can, in the hands of a savvy founder, allow one to attract supporters and donations early on. However, this effect can only go so far; a solid plan for raising money and awareness will be necessary for getting past year one or two.
Some Pros, some Cons: Fundraising and IRS rules
The general assumption is that being a tax-exempt charity and thus allowing your donors to deduct their charitable donations on their taxes will be the key to fundraising success and sustainability. It is true that a tax-exempt status can attract donors and give your organization access to certain funding opportunities (such as grants), but don’t be fooled — grants and donations are difficult to obtain, and thousands of nonprofits are competing, often, for the same pools of money out there.
Fundraising is a top struggle faced by nonprofits. Not only are grants or government funding extremely difficult to obtain, nonprofits who try to engage in any activity to raise money that does not closely align with their social mission — money dubbed “unrelated business income” — can be taxed by the IRS. Nonprofits selling sponsorships for events, for example, are prohibited from advertising in certain ways for their sponsors without risking penalty.
Even raising money through good old fashioned public donations is a challenge. Nonprofits can (and often must) have an office, training, and paid staff to operate programs and the organization, but generally, donors resist funding these things due to public misconceptions about nonprofit “overhead” and a lack of understanding of the true cost of making an impact.
A Pro or a Con, depending on who you ask: Board Governance
All nonprofits are legally required to be run by a Board of Directors, who can be held legally and financially accountable if something goes awry. If you’re hoping to start an organization, be one of its employees, and expect to decide your own salary, the nonprofit model is likely not for you. Your board of directors can hire you, fire you, and decide your salary and benefits, and it is not considered ethical to have a board vote if you are also receiving a salary for the organization, which means you can ask all you want for the salary you desire, but there’s no legal obligation for the board to grant it.
On the other hand, having a system that upholds checks-and-balances is an ethical, smart idea to protect the general public. In an ideal world, a board keeps the organization accountable, monitors conflicts of interest, protects the organization legally, and sets the vision and strategy for the cause for the long-term. A board can be your cause’s best asset and top fundraisers and advocates. The key is to find talented folks in the community who are committed to your mission and understand the depth of responsibility it takes to lead a nonprofit.
Go the B Corp route: Pros and Cons
B Corps are a type of “social enterprise”, an organization that works to address a social issue through strategies commonly used by businesses. Social enterprises and B Corps are starting to get the spotlight in recent years. While the term “social enterprise” made its first appearance in the 1950s, the concept didn’t start taking flight until the 1980s and 90s, and it wasn’t until the early 2000s when major business leaders and funders started to take note and invest in these types of organizations more seriously. Social enterprises can be nonprofits or for-profit organizations, however, certified B Corps are specifically for-profit entities with a social impact mission who adhere to a set of environmental and socially responsible standards. Famous examples include Ben and Jerry’s, Patagonia, or Cabot Creamery Cooperative.
B Corps organizations are vastly different from nonprofits, and may be an agile option for those seeking another path for their change-making.
Pro: Sustainable revenue, if you can pull it off
While nonprofits have to fight for grant or government support and face penalties if they engage in methods of generating revenue that don’t align with their social mission, B Corps can rely on profits made through standard business models, such as the sale of goods or services. For many, a month or two of lower-than-usual sales may not seem as stressful as losing entire chunks of nonprofit funding with no way to replace them.
Additionally, there’s a growing community of investors who thrive on supporting B Corps. While, similarly to nonprofit grant funding, there is sure to be strong competition for investment funds, B Corps can showcase their value in clearer terms than nonprofits often can: Profits from sales made, and impacts made through the social aspect of their business.
Con: No tax benefits
An obvious Con and major difference between B Corps and nonprofits are the tax implications of either model. B Corps can expect to pay taxes and are unable to accept tax-deductible donations from supporters, whereas nonprofits do not have to pay taxes, and donations can be written off.
A Pro or a Con: Rigorous certification process
You can’t just call yourself a B Corp and be on your merry way. Being a B Corp requires certification by the entity B Lab, and earning that certification requires your business meet a set of high standards including but not limited to donating a given amount of money or time to a cause each year, engaging in fair labor practices, and ensuring your team members pass background checks.
Once your organization is certified, your B Corp has to maintain its certification by submitting impact metrics and, possibly, undergoing a random site visit by B Lab.
While these rules and regulations may seem tedious, they carry two unexpected side effects: First, once you pass, you become part of a community of like-minded businesses who know what it feels like to go through the process. That camaraderie has value. Secondly, the standards set can, with some time and education, help the general public start to trust these types of businesses and earn them the goodwill many nonprofits enjoy out the gate.
Plot Twist: Do neither, and be a philanthropist, instead.
In their quest to make an impact, some folks reject launching organizations — nonprofit or B Corp — altogether, and take on a philosophy called “earning to give”. Coined by the relatively new Effective Altruism movement, “earning to give” is the notion that one of the most effective ways to make an impact on the world is to make as much money as you can in order to give much of it away to worthy causes. Earning to give argues that some folks might be able to make a bigger difference by using their specific talents to make money to fund charitable endeavors versus work in nonprofits or social enterprise themselves.
One thing is clear: Those of us in nonprofits and social enterprises wouldn’t hate a few more philanthropists in the world.
Thanks for reading! What are your thoughts? Share with us in the comments below.
