To Be or Not To Be? For Profit vs. Non-Profit

I’ve been doing some thinking lately about business structures, specifically around my organization’s UnCommon Sense sustainable operations leadership program. This program is operated under the umbrella of The Yellowstone Business Partnership, the non-profit for which I’ve worked the past 6 years. It’s a two-year peer support program for businesses, local governments and organizations seeking to operate more efficiently and responsibly. When I stop to think about it, it’s a non-profit doing great work and it’s also a business. We have participants that pay a tuition fee and partnerships with grantees (revenue), and we have staff and workshop costs and materials and overhead (expenses). Applying my prowess for complex, higher mathematics, at the end of the day (year, etc.), if our expenses are greater than our revenue, we’re not going to be around for very long.

I have always been drawn by nature to the concept of non-profit work. Non-profits are generally mission driven and have a “greater good” mentality that aligns with my personal values. Non-profits don’t pay taxes, but they also can’t use profits for anything that isn’t in line with the mission. The terminology “non-profit” is misleading, though sadly reality for many of us. Being a 501(c)3 does not mean that your organization can’t make a profit. Indeed, it must make a profit, or at least break even, to stay alive and continue to do their work.

Does being a “not-for-profit” lend an air of credibility? According to the Ivey Business Journal’s research on why Canadian companies aren’t more sustainable, “Claims made my some businesses and NGOs regarding sustainability are perceived to be credible, whereas others are met with skepticism or disbelief. The different reactions are likely related to attributes of the organization making the claims—its size, its structure, its actions, or its motivations…Companies want to know how to communicate their message credibly, so the integrity of their efforts is clear…One manager noted: “Polls show people consider academics and NGOs more credible than corporations and government.”

A business’s primary purpose, in the conventional sense, is to turn a profit and to create maximum value for its shareholders, everything else be damned. Until recently, the only way to get around this was to structure your organization as a non-profit, so you could have the “freedom” of being mission driven and not be beholden to the financial bottom line. Today many companies are challenging that single bottom line mentality and expanding their responsibility list from shareholders (those that have a financial stake in a company) to stakeholders, including customers, communities, flora/fauna, and even the Earth itself. This allows them to make business decisions beyond just what is financially the most profitable. A new corporate structure called a B Corporation enables corporations to be purpose driven and create public benefit for all stakeholders, not just shareholders. The B Corporation declaration of interdependence states:

·      That all business ought to be conducted as if people and place mattered;

·      That, through their products, practices and profits, businesses should aspire to do no harm and benefit all; and that

·      To do so requires that we act with the understanding that we are each dependent on one another and thus responsible for each other and future generations.

For fun, I did a quick google search on “for profit vs. non-profit” and came across a great Harvard Business Review article on the subject. The author (Jane Chen) outlines the fundamental difference between a for-profit and non-profit organization is how it can source capital. “A for-profit can raise money from private investors, for which it must give equity or dividends to shareholders; ultimately, a return on investment is expected. A nonprofit, on the other hand, can seek donations from individuals, foundations and corporations. Such stakeholders generally expect a “social return” on capital.” I wonder if UnCommon Sense could be structured in such a way to provide a combination—a financial return on investment from savings from more sustainable operations, and a social return by quantifying the collective benefits from each participant’s actions?

The article further describes the ways they tried to run their non-profit like a business: sell products/services at a margin and reinvest any profits back into the organization to fulfill long-term goals. This is easier said than done, as they discovered, and ended up created a for-profit arm that was a spinoff from the mission-driven non-profit, whereas the non-profit retained ownership of the intellectual property and through philanthropy could provide their product to the poorest communities that needed it, and the for-profit arm that raised money from venture capitalists and was responsible for capital intensive aspects of the work and setting up distribution networks and selling at a premium to those that could afford it.

This sounds like the best of both worlds, if it’s done well, and certainly an option that deserves further exploration. Chen’s final paragraph solidified this: “Making social impact requires innovative thinking, not just in terms of developing a new product or service, but also in terms of organizational structures and mechanisms for raising capital. The challenges that social entrepreneurs are trying to solve are some of the most formidable problems in the world, in areas with significant market failures, poor governance, and a complete lack of infrastructure. Effectively tackling problems in this environment may require leveraging both capital and expertise from grant makers and private investors alike. Ultimately, social enterprises should not be confined to a single type of legal structure. The most important part of choosing the right structure is starting with your mission, and then adopting a structure that allows you to best achieve it.”