Should I start a business or a nonprofit?
Anytime someone says, “I’m thinking of starting a nonprofit,” my immediate thought is to make sure I can’t talk them out of it.
As Dan Palotta points out in his semi-famous Ted Talk titled “The Way We Think about Charity is Dead Wrong”, charities/nonprofits face tremendous headwinds toward scalability. Palotta examined the number of organizations surpassing $50M in revenue since 1970, and found only 144 charities reached that level while 46,136 for-profit companies did.
Sure charities have a nice advantage in being able to receive donations and not pay business tax on income (at least not on income related to the charitable purpose). But we in the charity world pay a high price for those tax advantages in the form of extra regulations (have you ever read an entire Form 990?). Plus, IRS and state regulators actually punish risk-taking in a nonprofit and make it difficult to financially incentivize top talent. When was the last time a great world-changing technology or innovation was launched without taking risks?
We recommend seeking tax exempt status only where the organization will need to run on donations for a long time - longer than a few years – because earned revenue can never be expected to support the full weight of programming. K-12 schools, rescue missions, and churches are the classic example of places where donations will likely always be needed.
For nearly everyone else, we encourage them to take a long, hard look at becoming a for-profit company and raising startup capital through loans or equity raises. Prepare financial projections and examine whether it may be feasible to reach sustainability through earned revenue within a few years. If this is the route you want to pursue and are wondering which type of entity to start (LLC, corporation, B Corporation, S Corporation, etc) then see this blog.