While certain cases may be a very clear-cut answer to the question of ‘should I start a business or nonprofit?’, not all situations are so easy to determine. In some instances your mission may be accomplishable by way of starting a business or a nonprofit, so how do you decide?

Here are five important things to consider if you find yourself unsure of how to choose:

Purpose and Mission

Business: The main goal of a business is to make a profit, though many businesses were built around the desire to create a positive impact in a financially sustainable way. A business could donate a portion of their profits, products, or services to charity, or find other ways to support a cause, but their main function still differs from that of a nonprofit.

Nonprofit: A nonprofit focuses on a specific cause that benefits society or some segment of it. They are established not for enriching their members but to service the greater community. When you start a nonprofit you must understand that this is not about you – it is about the mission or cause you are working toward with this organization.

Source of Funding

Business: Funding is sustained through the sale of products or services, which in turn generates profit – hence a ‘for-profit’ business. Initial funding may come from investors, discussed below. Loans are also a common way for businesses to receive funding.

Nonprofit: A nonprofit organization will typically rely largely on donations in order to keep its operations running. Grants and sponsorships are additional ways to receive funds. Fundraising events can also be organized by a nonprofit in order to raise money for their efforts.

Investors, Stake, and Wealth

Business: A business can have owners, shareholders, and investors. They share a portion of the profits and value of the business, which is important in understanding their motivations and priorities. The main purpose of a business is to generate profit, which contributes to building the wealth of everyone who has a stake in the business.

Nonprofit: The goal of a nonprofit or its members should not be to get rich, though it is entirely acceptable to pay yourself and other members a fair salary. Another important distinction is that portions of a business are owned by individuals or other businesses, whereas a nonprofit is not owned by anyone. Nonprofits are not going to have investors in the same sense as a business, though they can have sponsors, donors, and grant funding.

Transparency and Scrutiny

Business: May be criticized for ‘corporate greed,’ though likely to receive less scrutiny than a nonprofit. It is possible to largely stay out of the public eye as a small business, especially if you’re the only one in your business. Transparency is more of an option than a requirement, so businesses tend to have a greater ability to avoid disclosing many details about how they operate. Publicly traded companies will have increased transparency and scrutiny.

Nonprofit: May be subject to more scrutiny as to how they allocate their funds as compared to a business. Nonprofit organizations are often criticized for spending too much on fundraising efforts or paying their executives too high of salaries as the funds were donated to help the cause, not enrich the members. At the same time a business typically pays high salaries to their top tiers but may not have the same level of required transparency, as well as not using donated funds for their payroll. This is tricky because building a nonprofit solely on volunteer efforts instead of paid staff is often not sustainable, nor does it support the efforts that the team puts into helping the cause.

Measuring Success

Business: Measuring success in a business generally comes down to a few key data points: profitability, stock price, cash flow – all of those financial numbers. While businesses may contribute to a cause such as reducing environmental pollution, their success is still measured by their business metrics independent of the impact they are making. Any impact data is usually used for their marketing but may be largely disregarded by those who are concerned more with profitability.

Nonprofit: Let’s face it – when we build nonprofit organizations it’s usually because we’re fighting an ‘unwinnable war’ of sorts by tackling an issue that is not going to go away overnight. Because of this it can be difficult to measure true impact and may require keeping track of a large amount of data. Furthermore, the financial metrics of a business do not translate equally into the nonprofit sector – one cannot measure profitability for a charity organization. Looking into funds generated versus how they were spent does not give the same picture as business profits would, and again we come back to the issue of measuring impact. How do we determine if a certain amount of impact was worth a given amount of funding? This is a tricky area with these organizations as these causes are not things we typically feel comfortable putting a price tag on, and this makes measuring success, in business terms at least, quite difficult.

Final Thoughts

Do your research before coming to a final decision on which path to take. Discuss your options with the rest of your team and see what others think. Ultimately, either choice can enable you to create an impact, but each has its unique benefits and challenges.

The final point I’ll make is that there is some middle ground when it comes to businesses and nonprofits. In a future article we’ll discuss some ‘hybrid’-type business models which bring in many aspects of a nonprofit organization.

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