If you’re already pursuing a specific social purpose through your business, you might be wondering what type of entity you should have set up – and what happens if you’ve chosen the wrong structure? (Lucky you if you haven’t set anything up yet – you can start with a clean sheet of paper!)
If you’re a Not-for-Profit (NFP), you might be kicking yourself because now you can’t attract investors who want to invest for a share of the profits.
If you’re a For-profit (perhaps a Pty Ltd company, or a trust), you might be totally frustrated by all those people who keep saying that they’d happily give you money if only you were a DGR (Deductible Gift Recipient, meaning that donations to the organisation are tax deductible).
In Australia, we don’t have a special legal structure for For-profit businesses that want to make a particular social purpose an unchangeable feature of their enterprise. Purpose-built legal structures (pardon the pun!) exist in other countries, such as the US and UK, but not here. In Australia, you need to choose either a for-profit, or a NFP, and sometimes you’ll need both.
So here are the 3 questions…
Question 1 – equity?
In order to be able to achieve scale, do you need to be able to attract investors who will provide capital in return for equity in your business (shareholders)?
Consider whether you might be able to expand by taking on debt rather than issuing shares. If debt will work for you, then a NFP is a viable option.
But if your answer is yes, you will almost certainly need a for-profit. In that case, you might consider adapting a standard for-profit company, to lock in the mission without turning it into a NFP.
If you’re not sure, it may be that you need to do some more work on your business model. Take a look at The Difference Incubator and Strategyzer for some cool resources.
Question 2 – DGR?
Do you need to be able to accept tax deductible donations from individuals and/or grants from philanthropic foundations that can only give to a DGR?
If yes, you need a NFP.
(Some philanthropic foundations will give to for-profit businesses, but many can only give to DGRs (Deductible Gift Recipients)).
Question 3 – both equity and DGR status?
Did you answer Yes to both of the above?
If yes, you’re probably going to need one of each! It’s possible to have a NFP and a for-profit vehicle running side by side, but you need to be clear on the role of each and their relationship with each other.
For example:
- who will be on the boards (will one or more directors sit on both boards?)
- which entity will employ staff (maybe the NFP if it can access fringe benefits tax concessions)
- which entity will own the IP?
If you haven’t established your legal structure yet, then you have a blank piece of paper for designing the best legal structure to enable you to power up your impact over the longer term.