As part of my work, I often talk with people about their ideas for a new business or service. Like so many potential entrepreneurs, the people I talk with are eager to do work that they believe in and feel good about. Many of the business ideas have a community benefit or social change aspect to the work—whether as the full focus of the business or as an important component of the organization. It’s not surprising then, that one of the most frequent questions I’m asked about these business ideas is, “should this be a nonprofit?”
I usually answer, “Maybe. Tell me more.” And 99% of the time, as the person describes their vision, their interests, and their motivations for starting their dream organization, my answer becomes, “No. This shouldn’t be a nonprofit organization. If you move forward with this idea, use another legal structure.” Most often, the issues of ownership and control prompt me to give this advice.
Most entrepreneurs are interested in controlling and managing their organizations—at least for a time. Many create organizations to provide themselves with a revenue stream. Structuring a new venture as a nonprofit does not align with these objectives.
A nonprofit organization is not owned by anyone. It is controlled by a board—or in some cases, its membership—not the founder of the organization. A founder may be part of the board or may even be hired by the board to manage the day-to-day work of the organization, so to a degree, the organization does provide them with financial support. But fundamentally, the founder does not own or control the nonprofit.
As a member of the board or staff, a founder’s position with the organization can change as the needs of the organization change. Their board term can expire. Their boss (the board) may decide to look for a new director who brings different skills to the organization. And like that, the entrepreneur is no longer even a part of the organization she created.
Some founders may try to hedge these risks by creating nonprofits that have boards in name only. The boards may be very small or inactive. These organizations may do good work in their communities. They may garner support from others. They may provide benefits to the people they serve. But in a critical way, they are functioning like a for-profit business because the organization’s primary purpose, first and foremost, is to benefit the entrepreneur who founded the organization. And this purpose will guide the organization in both big and small ways. Service to the community, even if it is important, becomes a secondary consideration.
As challenging as board management can be sometimes, it is fundamental to a nonprofit organization’s community focus. The differing perspectives that board members bring help an organization do its job of serving its community. Sidestepping this fundamental characteristic of a nonprofit organization sidesteps the core purpose of the sector—to exist for the benefit of the community, not to benefit an individual.
Most entrepreneurs, after learning more about the control structure and the fundamental purpose nonprofit organizations, opt to organize as a business. Often, the founder will be committed to doing good things for the community through the business. But the primary focus of the business is on making profits to benefit its founder. And this is as it should be—a business SHOULD benefit its founder, just as the primary focus of a nonprofit organization should be to benefit the community.