How to decide if your start-up should be non-profit or for-profit in 4 steps
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This document provides a 4-step process for deciding whether a start-up should be structured as a non-profit or for-profit organization. Step 1 considers the goals of making money or giving away services/money. Step 2 evaluates the viability of a for-profit business model. Step 3 examines potential capital sources that may require a non-profit or for-profit structure. Step 4 discusses the importance of founder control versus board/investor control in deciding between non-profit and for-profit structures. The document recommends evaluating hybrid structures if neither structure fully meets the founder's goals.
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How to decide if your start-up should be non-profit or for-profit in 4 steps
- 1. How to decide whether your start-up should be non-profit or for-profit in 4 easy steps. An oversimplification prepared by Ben Wirz, Director Business Consulting John S. & James L. Knight Foundation Contact: wirz@knightfoundation.org
- 2. 1. Do you need your business to make money for you? A. If the point of the business is to make you money... … then, the business should be for-profit B. If the point of the business is to give away money or services... … then, the business should be non-profit C. If you want a business that generates income to change the world and make you some money… … then, you need to ask yourself a few more questions… (see next page)
- 3. 2. Can your business be a viable for-profit business? A. NO , then focus on your charitable purpose and become a non-profit . B. YES , then ask yourself a few more questions (see next page)… In other words, is there a reasonable chance that the business will be able to repay all of the capital invested within 5-7 years?* NOT SURE? Focus on the revenue model: Who is your customer? How large is your target market? Can you be competitive within that market? Do you have a viable financial plan? What realistic scenario(s) would lead to capital reimbursement? *(1) 5-7 years is a general guideline, the timeline can be longer, particularly for asset intensive businesses (2) Reasonable chance of repayment does not mean risk-free, it just means that assumptions do not defy logic.
- 4. 3. Where will the capital to build your business come from? For- Profit Investors Only (angels, venture capitalists, corporations, banks, etc), then your business should be for profit . Early stage for-profit investors will want equity returns which non-profits are legally incapable of providing. Philanthropic Investors Only (foundations, philanthropists, non-profits, universities, etc.), then your business should be non-profit . Philanthropic entities find it easier to fund non-profits for legal reasons, and many programs are set up to be available only to non-profit organizations. Could be either or both? Turn the page.