There’s a confusing array of structures to choose from for a social enterprise. A threshold question is whether you need a Not-for-Profit, or a For-Profit structure. Sometimes you’ll need both.
Many people jump straight from business idea to “what structure do I need”? (or worse, business idea to buying an off-the-shelf company, without any thought about whether a company structure is going to do the job – it might, but it might not!)
Here are some prompters to get you thinking about key aspects of your business model. These are important in order to figure out the right legal structure. We’re going to do it the old fashioned way – follow the money!
How do you want to do good?
Or, put another way – what is your model for achieving positive impact?
- By giving away a % of profits, and/or
- Through the very products or services that your business delivers
Where will the money come from?
Where are you planning to get money from, and what kind of money will it be?
- Philanthropic foundations
- Grants
- Loans
- Equity
- Individual donations (do your donors need a tax deduction?)
- Investors looking for concessional or commercial returns
What will your obligations be with that money?
Which of these will work best for you and your business?
- Use it – as in the case of a gift or donation
- Acquit (report) – in the case of a grant or government funding
- Repay – in the case of a loan
- Pay a share of profits – in the case of equity investment
Do you need charity tax concessions?
Is your business model dependent on not paying income tax? What will work best?
- Set up as a charity
- Set up as a For-Profit and distribute to charities
What happens if your enterprise turns out not to be financially viable?
Which of these are you comfortable with?
- Lose your house (or other significant asset)
- Lose faith with grantors and donors, and other stakeholders
- Have an outstanding debt
What will you do with the profits?
Guess what, you do all of the following in a NFP as well as in a For-profit…!
- Give away a % to good causes
- Pay expenses including taking some as salary
- Retain some for growth of the business
- Share some with investors (In a NFP, you can’t share profits as such, but you can give investors a return on their capital in the form of interest on a loan.)
What happens in a bad year?
- Stop giving away a share of profits
- Just do less good if sales of your products or services are down
Resources
Need to do some more work on your business model? Try strategyzer, and The Difference Incubator.
Check out this video, and Justice Connect’s guide to social enterprise structuring here.