What’s Really Behind the For-Profit/Nonprofit Business Model

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Take Hot Bread Kitchen. According to the Stanford Innovation Review, the New York business “combines two traditionally separate models: a social welfare model that guides its workforce development mission and a revenue generation model that guides its commercial activities.” So, this organization employs low-income immigrant women to bake breads similar to their native country. Hot Bread Kitchen gains profit with its bread sales. But it also achieves its social mission in creating “a food system that equitably compensates talent and sustains a diverse workforce while celebrating culinary tradition and innovation…mak[ing] it possible…to provide industry-specific training and educational programming to benefit our clients.” (You never know. You could see a business entity like this, for instance, when conducting a Utah secretary of state business search.)

So, Hot Bread Kitchen, like other current businesses — think GoodWill Services and Habitat for Humanity — fall into this grey area, marrying nonprofit with for-profit. We call this a for-profit/nonprofit business model – which is a hybrid that fuses a for-profit business model (i.e. sole proprietorship, limited liability company, C corporation) with a nonprofit structure, whether that’s its social mission or philanthropic subsidiary.

The exciting news is that for-profit/nonprofit business hybrids are making headway. This is why we want to inform you about what they are and how they work.

Nonprofit and For-Profit: What Are They?

In a nutshell, nonprofit organizations form their legal structure around their social mission. In other words, what the nonprofit advocates for is a part of its legal business structure. For-profit organizations don’t work that way. Their social cause, if they have one, would not be in its mission statement but in an extra social program. It’s an extra, not a core component, as we see in the nonprofit sector. Put another way, if we break down goals, nonprofits want to further their cause. For-profit businesses want to make money.

Forming a For-Profit/Nonprofit Business Model

There’s no “right way” to creating this hybrid business model. A nonprofit organization could add on a for-profit subsidiary. Or vice versa. Or there could be no subsidiaries at all, just two separate business structures tied together under the same long-term contract.

Stress the Separate

For-profit/nonprofit hybrid models can be confusing. One, being that they’re so new and unfamiliar, people may make the (false) assumption that a two business hybrid structure means they’re completely interwoven. The reality is, they’re interwoven to an extent. It’s the extent part that needs to be emphasized. For this type of model to be successful, the for-profit and nonprofit parts need to be treated separately.

What this means is that the nonprofit sector is taxed like a nonprofit — with state and local tax exemptions. The for-profit sector follows the same tax rules as a regular for-profit business: if it’s a corporation, it’s taxed as a corporation; if it’s an LLC, it’s taxed like an LLC, and so forth.

How It Operates

Speaking of separate, for the for-profit/nonprofit business model to succeed, there needs to be two separate teams running each sector. Having only one team could raise a red flag, as they could use the nonprofit structure to circumvent the for-profit side, and vice versa.

Why It’s Making Headway

Inc sums it up best, “You get to have your cake and feed the whales, too.” Let’s explain. Standard for-profit organizations don’t receive as much compensation for championing a social cause as their nonprofit counterparts. And, going back to their goal, it makes sense; they need to make money for their shareholders. Supporting a social cause — something that doesn’t necessarily reel in a profit — doesn’t accomplish the for-profit goal; in fact, we can argue that it takes time away from that. In this sense, for-profit/nonprofit hybrids can have the best of both worlds: the for-profit sector can solely focus on its goal of making money, while the other nonprofit sector can zero in on its social cause.

But It’s Still Very Gray

It’s hard to finance, let alone run a for-profit/nonprofit business structure. Especially when it comes to entrepreneurs starting out in their industry. While the for-profit part makes it possible for venture capitalists and angels to invent in the business, investors may be hesitant to put their money towards something they’re not quite sure what it is. In this sense, this gray area can be a hurdle for new entrepreneurs to break into the industry and become successful (although it’s not impossible).

One Other Challenge…

Since this type of hybrid model is so new, not many employees or entrepreneurs have experience working with or in this business model. (Chances are, you’re not going to find many hybrid business on your search results when conducting Virgin Islands secretary of state business search either.) This makes creating a new work culture, one that’s different from strictly nonprofit and for-profit cultures, much harder. Likely, employees from nonprofit backgrounds and employees with for-profit experience are going to bump heads. One higher up may run meetings “nonprofit style.” While another may have a for-profit focus, whether they’re heading that specific side or not.

What the Research Says

Not everyone is jumping to form a for-profit/nonprofit business model. In fact, according to Forbes, entrepreneurs who’ve worked in a corporate environment longer than 22 years aren’t keen on adding a nonprofit subsidiary. Perhaps this is because these individuals are set in their ways?

Interestingly enough, entrepreneurs who’ve worked a couple of years in a corporate setting are more likely to add a nonprofit subsidiary. If older entrepreneurs with decades more work experience enjoy the corporate consistency, maybe younger entrepreneurs with less work experience embrace the change because they’re still adapting to the for-profit structure as it is? (A little more change may not be a big deal?)

Looking to Conduct a Utah Secretary of State Business Search?

Or, for that matter, a secretary of state business search in any other state? Check out Sec State, a secretary of state database that makes it easy to go from one secretary of state website to another. You can look up business entities, check business name availability, and, while you’re at it, see how many companies have a for-profit/nonprofit hybrid structure.