There are two questions I receive most often when meeting a social entrepreneur with a good idea for the first time. One is, “should I be a non-profit?”. The other is, “how do I create a brand?”. Neither is important at such an early stage of development. Let me speak to corporate structure.
Your structure should fall out of your business model and your personal philosophy.
Your philosophy is an important consideration. There are some people who are more comfortable with the culture and community of the nonprofit sector. The clarity of being mission-driven embodied in nonprofit governance resonates with them strongly.
You have a choice of many structures, all of which can be a social venture. You can be a non-profit, charity, cooperative, limited liability corporation, partnership or sole proprietorship. There are also hybrid structures e.g. a company wholly-owned by a nonprofit or a company that creates a foundation.
Here are some examples of pro’s and con’s for corporate structures:
- If your customer is the public sector, especially healthcare or education, you will find that there can be discomfort buying from the private sector.
- If your intent is to generate most or all of your revenue from business activities and especially if you’re intending to generate profit, you will find that Revenue Canada has many restrictions on generating revenue and profit as a non-profit or charity.
- Charities can provide tax receipts for donations, nonprofits cannot do so.
- If you want to pursue investment, only limited liability companies can do so.
- Nonprofit and charities can access foundation funding, which is an important source of grant-funding
- All structures can access debt-financing
- If you want to “own” your organization so you can sell it later, you need to be a company but if you believe in collective ownership you can be a cooperative
- Reporting requirements for nonprofits and charities are demanding while there is minimal reporting for companies, depending on your sector
Do the work to figure out your business model first and then seek expert advice. There are lawyers who specialize in nonprofit and cooperative corporate law. It’s worth investing in professional services before you wed yourself to a corporate structure.