According to the US Small Business Administration, there were 30.2M for-profits in the US in 2018, with almost a 50/50 split between people working for large (>=500 employees) and small (<500 employees) companies.
Meanwhile, the National Center for Charitable Statistics reported there being 1.5M non-profits registered with the IRS in 2015. These non-profits contributed just shy of a trillion dollars (5.4% of GDP) to the economy with 1 in 4 American adults volunteering in 2017.
Big numbers on both sides for sure. With all this context — if you are an entrepreneur trying to decide whether to make your idea into a for-profit or non-profit, there are four key things to consider.
For-profits obviously pay taxes although if there are several optimizations, for instance, startup founders can defer capital gains by electing 83b. Non-profits on the other side are exempt from paying sales and property tax completely. The income of a non-profit is also not subject to federal taxes but they must pay employee taxes (Social Security and Medicare) just like any other company.
Non-profits live from grants and donations and many will tell you they spend as much as 50% of their time just fundraising, splitting the rest for administration and actual work. Enterprises that are for-profits with social goals do have social venture capital available to them, an emerging source of funds. When it comes to the purely for-profit world and startups specifically, most also spend significant time fundraising, indeed a typical round requires the CEO to make it priority #1 for 3-6 months. But the universe of profit-driven investors is much bigger and quantities in the millions and certainly in the billions are essentially pipe dreams for non-profits.
Non-profits can be extremely profitable — Ikea is actually incorporated as such, a structure that remains controversial. The definition of non-profit is that it employs any profits it may have back into the entity. For-profits, on the other hand, do not have that limitation, which means stakeholders such as investors can harvest disproportionate returns. Which also gives them far more latitude to experiment with business models since there is a higher cultural acceptance of risk-reward. Just imagine being a non-profit and telling a prospective donor that you lost it all on a challenging project.
According to LinkedIn’s Workplace Culture report in 2018, nearly nine out of ten millennials would consider taking a pay cut to work at a company whose mission and values align with their own. Consider that for baby boomers that figure was almost ten times less. So certainly the adage of running your for-profit with the ethos of a non-profit is holding ever true.
So what does it mean for you as an entrepreneur? Incorporate your idea as for-profit or non-profit based fundamentally on what you want to optimize. Often times you may have to just punt the question for the future once your idea has matured enough that you can assess results. And if the pros and cons are truly balanced then create both a for-profit and a non-profit entity that are connected. L3Cs and hybrid organizations are more complicated but offer the option of leveraging the best of both worlds.
This post is inspired by a conversation with Abe Elmahrek; I have created and run both for-profits and non-profits over 20 years. These are purposely short articles focused on practical insights (I call it gl;dr — good length; did read). I would be stoked if they get people interested enough in a topic to explore in further depth. All opinions expressed here are my own. If this article had useful insights for you do give a like, any thoughts comment away.