Non-Profit or For-Profit: The Social Entrepreneurs Dilemma

money mealBy Darius Graham

When starting a new venture, entrepreneurs face a number of choices. These range from picking the right name to selecting the right talent to join the team. These questions are critical and should be addressed with the utmost care and deliberation, as they can make or break a business. One other choice faced by an entrepreneur that wants to offer a product or service and make a difference is whether to create a non-profit or for-profit. This is a choice especially difficult for social entrepreneurs – people that want to combine profit and purpose.

While it’s worth thinking about because of the legal distinctions and consequences of selecting either, the choice between for-profit and non-profit is not as important as it used to be as more non-profits generate income from business activities that go back to support the core charitable programs, and for-profits build giving back into their corporate mission.

Two local examples illustrate how a non-profit organization can blend in aspects of a traditional for-profit business. Food For Life’s core mission is to help train young adults in culinary arts and equip them with life skills, but it also sells the meals that the participants produce to the public in order to generate revenue to sustain its charitable program.  DC Social Innovation Project, which helps launch innovative community initiatives, also generates revenue by offering basic financial services that help non-profits focus more on their mission instead of administrative tasks.

For-profit businesses can also blur the line and adopt some charitable aspects into their work while also boosting their bottom line. Here’s a look at how three different types of for-profit companies are building in social good and how any business can adopt these models.

Product
Tevolution and MyCause Water build social good into their business model by donating a portion of the proceeds from each product sold. The creators of Tevolution wanted to create a healthy and delicious bottled tea that its consumer could enjoy while also making a difference. So for every bottle of tea purchased, $0.25 goes to a non-profit organization. Similarly, MyCause Water – a maker of great tasting bottled water – donates $0.05 for each bottle sold. Even if a company can’t quite adopt this model, simply committing to donate a certain amount of its product to a non-profit organization can be beneficial – like a bakery regularly donating loaves of bread to a shelter on a regular basis. This can in turn generate goodwill for the brand and boost its bottom line.

Service
Palantir is a company creating software that helps companies and organizations make sense of massive amounts of data. It has taken the smart step of creating a team of philanthropy engineers within its company that works pro bono with non-profits on the same “big data” issues that Palantir’s traditional engineers tackle for its for-profit customers. It is a model that can be adapted to even a small business with just a few employees – like a design firm could work with non-profit clients pro bono to help them revamp their logo, overhaul their website, or create a new brochure. This could simultaneously provide a great professional development and training opportunity for the employee by presenting a new type of challenge, while also giving the firm an additional way to showcase the range of high-quality work it produces.

App
SendHub is an application for smartphones that provides a simple way to send group text messages. It uses the “freemium” model by offering its basic messaging service for free and offering a premium service for a fee to users wanting even more features. While SendHub is in business to generate a profit, it strives for its app to be just as useful for social causes and used by teachers and community organizations to share critical information. Thus it shows how a for-profit company can build something equally beneficial to businesses and non-profits alike – and with a great product the non-profit may become a paying customer for the premium service.

With these models as guides, beyond the legal and tax implications, the choice between starting a non-profit or a for-profit need not be an agonizing one for the social entrepreneur since both types of entities can draw on elements of the other. And even existing companies and non-profits can use these examples as a model to blend profit or purpose into their work.

Darius Graham, an attorney, is co-founder of DC Social Innovation Project and a Social Entrepreneur-In-Residence at the Center for Social Value Creation in the University of Maryland, Robert H. Smith School of Business.

[Image credit: Lynne Hand, Flickr]

The posts on this page are contributed by students from the University of Maryland's Robert H. Smith School of Business in conjunction with the newly launched Center for Social Value Creation. The center's mission is to develop leaders with a deep sense of individual responsibility and the knowledge to use business as a vehicle for social change. These posts are a way to continue the dialogue outside of the classroom and share the viewpoints of Smith students on the challenges and opportunities of triple bottom line thinking.