The Best Business Structure for Nonprofit Organizations

Non-profit organizations (NPOs) can adopt various business structures, but often the social enterprise model emerges as particularly effective. This model allows organizations to generate revenue through the sale of products or services, and then use those earnings to support their charitable mission. This approach is highly efficient as it provides a sustainable funding source while ensuring alignment with the organization's mission.

The Corporation Structure

The corporation is the most common and usually the best form for a nonprofit organization due to its numerous benefits. While there is an initial cost for these benefits, such as registering with a state and making periodic filings and disclosures, these are generally manageable with minimal impact.

To establish a not-for-profit corporation, the organization must first be incorporated with its home state of incorporation and then apply for tax exemption with the IRS. This process ensures that the NPO can operate legally and take advantage of tax benefits, making it a practical choice for many organizations.

Business Model Framework

A business model is a comprehensive system that outlines an organization's value creation process. The framework comprises three essential components: context, strategic decisions, and alignment.

Context

The mission and vision of the organization dictate many of the subsequent decisions. For instance, Ability Beyond began in the 1950s with parents of disabled children volunteering daycare and school services. By 2010, their vision expanded to include a broader range of needs and a larger geographic area. As the vision grew, so did the strategic decisions and the need for more resources.

Strategic Decisions

Decisions about who to serve, through what product or service and at what level, are critical. These decisions aim to achieve short-term, medium-term, and long-term outcomes. Ultimately, these outcomes guide further decisions on funding strategies and organizational structure.

Alignment

Alignment is the core of a business model. NPOs must define a funding model that generates revenue to support strategic decisions and the organization's vision. Here are potential funding options:

Foundation-Controlled and Fund-Raising Operations

Many libraries and free zoos have foundations and various fund-raisers to generate money for operations. This model leverages external funding sources to support the organization's mission.

Affiliations with a For-Profit Organization

Bright Horizons, a public employer-sponsored daycare corporation, has a sister nonprofit entity, the Bright Horizons Foundation. This affiliation allows for shared resources and a dual mission approach.

Benefit Corporation or B Corp

While not nonprofits per se, some companies have a legal structure that requires a greater emphasis on a social cause than on stockholder interests. Seventh Generation, a certified B Corporation, focuses on stewarding social and environmental progress as part of its corporate charter. It operates with a balance between profit and social impact.

Organizations Using Product Donations

Even without filing as a benefit corporation, organizations can still do good works. Newman's Own Foundation gives all profits from the sale of Newman’s Own food and beverage products to charity. Similarly, TOMS offers a product to a person in need for every product sold, showcasing a direct social impact model without formal certification.

Government or Non-Government Contracts

Many social service organizations receive partial support from city, county, or state agencies. ORP Management, an employee-owned family of companies serving people with disabilities, receives funding from relevant county and state agencies. This model leverages government support to enhance the organization's operational capacity.

In conclusion, the best business structure for a nonprofit organization depends on the specific goals, resources, and mission of the organization. Whether through a social enterprise model, traditional corporation structure, or alternative models such as affiliations or product donation strategies, nonprofits can find a structure that aligns with their vision and mission.