Starting a New Business: Nonprofit or For-Profit Sector?

Say you have a brilliant idea and want to start an organization to actualize your vision. Oftentimes, these ideas are more than classic profit maximizing endeavors, they may have positive social impacts as well. What type of organization should you start? The first question to ask is, what sector should your organization be in? The nonprofit or for-profit sector?

Where Does Your Idea Fit?

Don’t automatically assume your venture is either a for-profit or a nonprofit venture. Assuming one option over the other may set you up for a frustrating experience. Accept that the sector you know may not be the best sector for this current business idea. Also, remember that picking a sector-level “entity” type is a question of funding sources. But before you even begin pondering entity selection, determine what sector your idea fits in.

Sector Determination

Considering the following four areas when evaluating what sector to develop your organization in:

1) Product – Are you providing a good or a service? It used to be that most organizations created and sold something; remember the classic “widget” example from high school economics? However, today most organizations are service providers. They operate in two general spaces:

  • Professional service providers (legal, medical, accounting, software management, educational)
  • Online marketplace (Ebay, Facebook, Etsy, etc.)

2) Delivery Model – Who is the end-user or target audience?

  • B2Business
  • B2Consumer
  • B2Government
  • B2People

3) Who Pays – Who pays for delivery of product to end-user?

  • Business Pays – Your law firm buys Microsoft Office for you to use at work.  Firm pays for cleaning service that cleans your office at the end of the day. Firm pays for copy machines that you make copies on at work.
  • Consumer Pays – You go to Target and buy cleaning supplies. You go to Sears to buy an appliance. You go to a car dealership to buy a car.
  • Government Pays – Traffic lights are paid for by the government with tax dollars. Road maintenance is paid for by the government with tax dollars. Public schools are paid for by tax dollars.
  • People Pay – Religious organizations, art institutions, and museums are paid for by people collectively with philanthropic dollars

4) Exit Strategy – What do I (the entrepreneur) want to get out of this business?

  • A job for a few years
  • A business that will support my family now and when I am gone
  • An enterprise I can start and pass on to the next generation of social entrepreneurs
  • A way to get rich

Take-Aways

Work through the entire analysis before you select one sector or another since changing is hard! Don’t select advisors by sector until you know you are in the correct sector for you. Think long-term if possible

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