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Why Starting A Non-Profit To Create Social Change Is A Bad Idea

by Rieva Lesonsky

Publisher‘s Note: The legal rules that are given as advise here only applies to USA. Find some equivalent. However, the article does give a good point. Sustainability is something that needs to be addressed. Idealism anchored in realistic methodology is something to aspire if you are truly serious with what you wish to accomplish.

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August 26, 2012 (TSR)  – Combine their penchant for creating social change with their innate entrepreneurial inclinations, and it you might expect a wave of Gen Y-owned non-profits to launch in the next few years. That might still happen, but the latest research suggests that non-profits may not actually be the best way to drive social change.

Much has been made of Gen Y’s dedication to social change. A study from Walden University and Harris Interactive, released last year showed an astounding 81% of Millennials had “donated money, goods or services” to promote positive social change. The “Social Change Impact Report” also indicated that “70% of Gen Y adults have educated others about a cause or issue, and 68% have participated in volunteer work or service.”

This apparent desire to change the world has carried over into Gen Y’s career plans as well. Steve King and Carolyn Ockels of Emergent Research make the preliminary argument citing among other studies a Pew Research report that says 22% of Gen Yers believe “having a job/career that benefits society is ‘one of the most important things in their lives.’” Just 14% of adults over age 35 believe that.

So bring on the non-profits, right?

Not so fast

For Profits Can Do More Good

It turns out that starting a non-profit might not be the best way to change the world. Geri Stengel, the founder and president of Ventureneer, a company that helps educate socially-responsible small business owners and social entrepreneurs, says there are several options startup entrepreneurs should consider before launching an organization dedicated to social change.

She suggests your “first choice when starting a company to create a social impact should be a for-profit business,” because she says, the “revenue streams are more reliable, and there are more dollars available (both debt and equity) for starting and growing.”

Hal Shelton, a small business mentor who sits on the board of directors of The SCORE Association, agrees that starting a nonprofit is not your best choice. “True, one of the few advantages of starting a nonprofit,” he says, “is that you’re eligible to receive grant money. And contributions to your nonprofit are tax-deductible for donors.” But non-profit founders still have to aggressively raise those funds.

Non-Profits Are Harder To Start, Sustain

Shelton adds that it’s a bit more cumbersome to start a non-profit. You have to establish a formal board. Paid employees (including founders) are generally not eligible to sit on that board, which could limiting your independence. In addition, he says, every state has different not-for-profit regulations, so entrepreneurs need to check with their state regulators before they even get started.

Stengel says there are better options that allow you to launch a for-profit business, yet still enable you to effect social change. One way is to create a B Corporation (an option I wrote about several months ago in ReadWriteweb). Or you could become a L3C, or “low-profit” corporation. The state of Vermont, the first state to enact this type of company, explains that an L3C is “a cross between a non-profit organization and a for-profit corporation. The entity is designated as low-profit with charitable or educational goals.” So far only a handful of states have passed L3C legislation, though other states are considering introducing it.

4 Good Ideas

Both Shelton and Stengel suggest starting a for-profit company, and then use the profits to establish a foundation to do your good works. Or, Stengel suggests, you can implement these ideas:

• Give a percentage of profits [or revenues]to an existing non-profit that supports causes important to you.

• Match employee donations to non-profits of their choice.

• Source ethical suppliers.

• Minimize harm to the environment.

If you still insist on starting a non-profit, Stengel says “make sure you know where your long-term reliable revenue streams are going to come from.” She advises founders to “Look at comparable non-profits to determine how they generate money. Does the government pay them fees for service? Does their money come from foundations or individuals? If individuals, are they small donors or major donors? Or do they generate revenue from cause marketing or licensing?”

The key is that entrepreneurs can still effect social change whether they operate a for-profit or non-profit business. As Stengel says, your company can “make a social impact by using an innovative approach to solving a social or environmental problem, and using business discipline to ensure your business thrives, so you can develop sustainable solutions for the problem.”

Originally published in ReadWriteWeb.

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