Organization Structures

There are many different organizational structures that can be utilized and still be a successful social entrepreneur. Depending on what you want to accomplish, how you want to accomplish it, and the operating environment, you can effectively determine which organizational structure works best for you to serve your ends. This article details the different structures to choose from and the advantages/disadvantages associated with each.

What are the different types?

Nonprofit: This structure, in its most common form as a 501(c)3, is the most popular and for good reason. Nonprofits are mission driven, as are all social ventures, and have a nice advantage of being tax deductible. There are other types of nonprofits with other advantages, but for the purposes of a social entrepreneur, the nonprofit is the most relevant. The legal difference between a nonprofit and a for profit is a non-distribution constraint, which means that any profits an organization makes cannot be transferred to the shareholders. Another reason why this model is very popular is because there is a general understanding that the nonprofit structure is necessary to fulfill needs that cannot be served by traditional market mechanisms. While this is generally true, the most innovative social entrepreneurs find ways to make in some sort of revenue stream, but by no means is it a requirement.

For profit: This organization type comes in many flavors, including traditional C corporations (ATT), S corporations (has less than 100 shareholders), Limited Liability Company (LLC) (a newer and fast growing structure), partnerships (think law firms), and sole proprietorships (Bob's Machine Shop), and vary mostly on how they are taxed and who can participate. Most of these structures aren't very popular and relevant to social entrepreneurs, but the one that we will talk about because of it's popularity and flexibility is the LLC. The reason it is popular is due to it's ability to flow through taxes to individual shareholders (C corporations and S corporations tax at both corporate and individual level), and the ability to customize Articles of Incorporation to include things like a social mission. If your organization is likely to need investment capital from Angel Investors or Venture Capitalists, is likely to have multiple revenue streams, or wants to make investments itself, it will benefit most from a for profit structure like an LLC. The final point, are the two major disadvantages in for profit structures. The first is that they are not tax deductible, thus they have to pay taxes in multiple ways. The second, and most important, is that if there ever comes a time when the organization must choose between profits and mission, the profit will nearly always win.

Hybrid: All right, this is a little like cheating, but there are many different social entrepreneurs trying to utilize innovative structures to meet their ends. Some utilize a for profit / nonprofit duality that allows the benefits of both for profit and nonprofit structures. Other organizations, like B Corp, are trying to take away the disadvantages of having the for profit model - namely the conflict between profit and mission - by baking the social mission right into the articles of incorporation. This is what LLC's can do, but for an already existing organization, they will need to reincorporate as something else in order to protect the mission. The reason why a separate legal structure is being sought is to bring to national attention the need for businesses that are socially and environmentally responsible as well as profitable. The second reason, and the more important reason, is that there are certain standards that must be met to attain the B Corporation status, and having this status means there is an easy way for consumers to know whether or not businesses are proven to be fulfilling a social mission. From a nonprofit perspective, there are a number of nonprofits that operate a business inside of the nonprofit and utilizes the profits to subsidize the services they provide to underserved stakeholders. For example, Aravind Eyecare charges patients who can pay for faster service with better rooms and utilizes any profits to provide free service, which is slower and the rooms are dingier.

How should I make my decision?

  1. Assess similar organizations - Are the organizations in the sphere you are trying to serve generally for profit or nonprofit? Why? Once you know the answer, then you can determine whether or not you should adopt a similar model or choose something else.
  2. Which benefits are most important to your organization? - Do you need tax deductibility? Do you need organizations to invest in your growth? Do you need instant credibility for your products that your customers can see?
  3. What resources are at your disposal - Do you have access and a large network of contacts in the for profit world? Do you have a lot of experience sitting on a board of directors, or studying why people give? Use your expertise to your advantage instead of relearning how other structures work.
  4. What is society's attitude toward your structure choice? - While similar to #1, it is very important that the structure you choose will not get in the way of fulfilling your mission. For example, if you are operating in the education realm and need access to students, be very careful about choosing a for profit business model as you could instantly lose access to students because administrators / school counselors could mistrust your intentions.

Conclusion

There are many different choices a person can make in regards to an organizational structure. It is important to move quickly, but not too quickly and make a bad decision that ultimately causes more trouble in the end. Many times, if your organization is small enough, you can operate without incorporating and test out the market's reaction to determine which structure makes the most sense. Do people offer to donate to your cause? Are they asking how much you charge for a given service? This can help you find what makes sense and then put everything in order to get your organization up and running. Best of luck, and get moving!

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