A common misconception I often hear in the start-up world is that nonprofits are easy and safe, since they don't have to pay taxes, and they don't have to make a profit for their shareholders. In reality, from the feedback I get from nonprofit executives, exactly the opposite is true.
Technically speaking, in the United States, a nonprofit corporation or association is one which has been exempted from federal income taxes by meeting the criteria set out Section 501(c) of the Internal Revenue Code, most notably religious, educational, and charitable entities. Other countries have similar exemptions for similar organizations.
Yet even a nonprofit has to make a profit on everything it sells, in order to cover operating expenses (salaries, offices, equipment, research, travel, etc.), unless it relies wholly on donations. Even then, the business and leadership efforts to solicit and manage donations cost real money, and may be more difficult than the marketing and sales jobs of most start-ups.
Here are the common reasons I hear that make starting and running a nonprofit actually more difficult than starting and running a conventional business:
Unfortunately, misuse scenarios, like the lavish lifestyles of leaders and scams, have given the nonprofit environment a bad name, making things even tougher. Even reputable organizations, supporting veterans, the police, firefighters or children, often raise eyebrows, with alarming real data like these from the 10 Inefficient Fundraisers report from the Charity Navigator website:
These numbers vividly show that nonprofits with good causes can fail to achieve satisfying results, in the same way that for-profit startups often fail, even with good products. Despite these challenges, my advice is still to follow your heart and your passion when starting a business.
You shouldn't choose a nonprofit, or a for-profit, because one seems easier, or one can make more money. Do it because you love the cause, the service, or the product, and the challenges will get lost in the satisfaction and results you achieve along the way.
Follow Marty Zwilling on Twitter: www.twitter.com/StartupPro
Nonprofits are an essential part of our society, helping to solve the problems that government and the private sector cannot. Most employ hard-working, committed people. Most have dedicated leaders. Most spend TOO little on their infrastructures, when they should be investing more to build them. If they invest too little, they can't accomplish their objectives.
Could they operate their organizations more efficiently? Probably. But, then we could say that about most businesses, too.
Why anyone would consider starting a nonprofit as an alternative to starting a business is beyond me. The people who start nonprofits do it because of a calling, a life experience that sets them along the path, or a passion for a particular cause. It is a long road to achievement. Longer than most start-up businesses.
paul,
http://paulivanuca.me
Some of the difficulties you identify were used when we reasoned the case for a social purpose business instead of charity:
""In Chapel Hill, North Carolina, for example -- where P-CED was born in 1997 -- multi-millions of dollars are donated each year to charities, after which the money is typically given away, spent, and gone. Two churches adjacent to the university campus recently raised in excess of four million dollars to improve their buildings. (As a counterbalance, a third church chose to forego its own plans for a building and donated its entire building fund to a badly-needed support program for the elderly.) If twenty percent were set aside to fund a "P-CED enterprise", that money would never go away, but would instead grow as it should in business. Once the seed capital is available and the business plan implemented, everything after that goes the normal way of business. Employees are paid according to the local pay scales, receive benefits, and so on. They would also enjoy profit-sharing directly for themselves from a total pool of ten percent of profits. Forty percent of profits would be rolled back over into the company for growth. The remaining fifty percent would go to the trust fund. Thus, aside from the final direction of profits, everything is exactly the same as with any other business enterprise."
http://www.p-ced.com/1/about/history/
Kelly Reddington from Givengi here -
Non-Profits are doing a fabulous job of utilizing business to generate donations, and what we do at Givengi, is make any Non-Profit, a business. We take care of the overhead costs and the products so that the Non-Profits can focus on their mission - improving the lives of others.
We began with a focus on fundraising because we realized that the current fundraising model didn't exactly work efficiently. On average, 22 to 43 of ever $100 raised is spent on raising said $100. Totally out of hand!
So we built a fundraising model that has the potential to re-imagine the Non-Profit/Business relationship.
Another fantastic development has been BCorp certification. This allows entrepreneurs to start businesses with a social purpose in a way that previously never existed. Social entrepreneurship is about to become HUGE. So to any prospective entrepreneurs out there, look into starting a BCorp to amplify the value you offer to society.
As always Marty, pleasure reading your work.
Until Next Time,
Kelly