Small business owners tend to be driven by a fiery passion for what they do. And sometimes, what they do happens to benefit a particular cause or community. In such cases, maybe a standard, for-profit business model isn’t the right fit.
If you’re starting a business but want to focus on supporting a cause or community, maybe forming a nonprofit makes more sense. How do you know for sure? Read on and see!
1. Identifying your goals and values
Is money your primary objective? If so, nothing wrong with that. Like it or not, we do live in a capitalist society!
But if there’s more to your mission, try to pin that down before going further…
What’s at the beating heart of your proposed business model?
Is it an unrelenting desire to help others?
A compulsion to address an urgent need in your area that “someone” needs to do “something” about?
We suggest that you take time this week to figure this out before making any major decisions. To help, try the following two steps:
Step #1: Stream-of-consciousness writing!
“Stream-of-consciousness writing,” explains MasterClass, “refers to a narrative technique where the thoughts and emotions of a narrator or character are written out such that a reader can track the fluid mental state of these characters.”
“That sounds like fiction writing,” you might argue. Yes, but it works for creative brainstorming, too. Imagine you are writing a character—and it’s you. Now you, the author, have to explain your autobiographical character’s internal motivations for launching a business enterprise.
Whatever comes to mind, write it out, stream-of-consciousness-style. Don’t hold back, don’t try to edit as you go, don’t worry about how it sounds…and if you go off on a tangent, that’s okay. Go where it takes you. Spill your guts on the page (because you can always delete or burn it later)!
Step #2: Pick out your answers.
Time to put on our cold objectivity caps and analyze what you wrote on the page.
Can you discern motivations?
Can you extrapolate your personal and professional goals related to your new endeavor?
If you found your answers in your stream of consciousness text, pluck them out and polish them up. If not, return to Step #1 and write more or start over!
The idea here is to identify your true values, motivations, and goals. But when it comes to writing, we tend to write what we think we’re “supposed” to. We get preoccupied with sounding the way we want others to perceive us—instead of just being honest with ourselves.
So try the stream of consciousness exercise first. Then go back in with an editorial eye to pick out the parts that reveal your real intentions.
2. Understanding the differences between a business and a nonprofit
Let’s make a quick comparison between for-profit businesses and nonprofits.
Who owns it?
Nonprofits don’t have owners, and they are beholden to the public.
A for-profit business has an owner or owners. It is also beholden to shareholders (if any).
What’s the mission?
Nonprofits have a “mission and purpose” to “further a social cause and provide a public benefit.” To qualify, the business “must serve the public good in some way.”
A for-profit business can have whatever mission it wants—but in the end, it exists to make money by selling a product or service. A potential downside is, if it has shareholders, it is obligated to try and make a profit for them. Indeed, shareholders can sue a company that breaches its duty. This can be an issue when an owner’s values get in the way of generating revenue.
What’s the supplemental mission?
A nonprofit still has to make enough to pay its operating expenses; thus, this becomes its secondary mission.
By the same token, a for-profit has to ensure all of its products or services are making money, too. If not, changes should be made ASAP.
What’s the revenue stream?
Nonprofits can sell products or services, but these are limited to items related to their mission. They generate income through grants, donations, membership dues, program fees, etc. The con there is that it can be very time-consuming to fill out applications, do fundraisers, or keep members engaged (and paying).
By contrast, for-profit businesses make money mainly by selling whatever products or services they want! They can also (potentially) make money by investing earnings. But again, a company with shareholders has to be careful about such things, for a risky investment that losses money could create a liability.
Who staffs it?
Nonprofits may have paid staff, but they also lean heavily on volunteers—which is a great way to save money (and a penny saved is a penny earned, after all!). The downside is that volunteers may come and go. Such turnover means spending more time training…and having less available expertise on hand.
For-profit businesses usually have employees, but may also work with contractors or use interns. The downside is paying employee-related taxes, offering benefit packages, and dealing with other HR-related issues.
How about taxes?
Nonprofits can file for tax exemption (but must still follow reporting guidelines and submit forms each year to the IRS). Tax-exempt status is obviously a major benefit to any business model.
For-profit businesses pay income and employment taxes. This includes individual business owners paying self-employment tax. Some goods and services are subject to excise tax, though businesses typically pass the costs to consumers.
What legal structures are available?
A nonprofit may start as a non-profit corporation, designed to support a charitable, religious, or educational cause, or function as a private foundation. As such, it is governed by state laws.
It can, if desired, register as a 501(c)(3) organization to obtain federal tax-exempt status. All 501(c)(3) organizations are nonprofit corporations… but not all nonprofit corporations file to become 501(c)(3) organizations.
There are also the 501(c)(2) designation for title-holding trusts, and the 501(c)(4) designation for social welfare organizations.
For-profit businesses can form as either:
- Sole proprietorships (as they sound, one person owns and operates the business);
- Partnerships (two or more persons own the business);
- Limited liability companies (LLC) (which provide—you guessed it—limited liability protection for owners); OR
- Corporations (for larger entities with shareholders)!
3. Evaluating the market and community needs
Another factor to consider in your decision-making process is the market demand for your product or service. If you plan to operate a physical business, it’s imperative to do ample research about local market conditions.
For example, are there competitors in the area with a similar business model? If so, how are they faring? Is the market saturated or can you distinguish yourself from the pack?
If you’re leaning more toward the nonprofit route—does your community have a genuine need for the services you want to offer? In other words, are you creating a solution to a problem that actually needs your help?
Conversely, if the problem is big, will you be able to address the issues with the resources you plan to have? Or will you need the ability to expand without going over budget?
Either way, whether you decide to start a nonprofit or for-profit business, you’ll eventually need partners and collaborators on your team. That may be in the form of investors, marketing strategists, or like-minded organizations that can offer support and mentorship. It can even take the form of third-parties partners like Ruby!
Follow your passion.
Whichever route you choose, remember to keep your community in mind. Small businesses are built on relationships and delivering consistent, top-notch customer experiences any time, day or night.
At Ruby, we’ve teamed up with thousands of businesses (and nonprofits) to provide such incredible experiences 24/7/365 days a year—via our affordable virtual receptionist services!
If you’re on the fence about whether you need a full-time, in-house staff member for your customer support and receptionist functions, check out our flexible, affordable packages first. Our expert team members integrate seamlessly into your workflow, handling on-demand tasks and freeing you up to focus on growth!
