When considering whether to structure your organization as a Benefit Corporation or a Nonprofit, it's important to understand the fundamental differences between the two options and evaluate which structure better supports your mission and goals. While both types of organizations aim to do good in the world, they differ in purpose, legal requirements, funding opportunities, and tax status. For most mission-driven organizations, forming a nonprofit is often the best option, particularly when the focus is on maximizing social impact rather than profit.
Key Differences Between a Benefit Corporation and a Nonprofit
Purpose:
Benefit Corporation: A Benefit Corporation is a for-profit entity that is legally obligated to consider the impact of its decisions on society and the environment, in addition to maximizing profits for shareholders. It can engage in social and environmental missions but is still required to prioritize profitability.
Nonprofit: A nonprofit organization is created for a charitable, educational, religious, scientific, or other public benefit purpose. Unlike Benefit Corporations, nonprofits are not intended to generate profit for shareholders or owners. Instead, any revenue generated is reinvested back into the organization to further its mission.
Tax Status:
Benefit Corporation: A Benefit Corporation is a for-profit entity and is subject to corporate income tax. It must pay taxes like any other business, even though it is expected to fulfill a social mission.
Nonprofit: A nonprofit, particularly one that qualifies under 501(c)(3) of the Internal Revenue Code, is tax-exempt. This means it is not subject to federal income tax, and donations made to it are often tax-deductible for donors. This is a significant advantage for organizations relying on donations and grants.
Funding and Donations:
Benefit Corporation: As a for-profit entity, a Benefit Corporation can raise funds through equity investors and pay dividends to shareholders. It operates like a business, focused on generating profits while achieving a social mission.
Nonprofit: A nonprofit typically raises funds through donations, grants, and fundraising activities. It cannot issue stock or pay dividends to shareholders. The focus is on securing philanthropic funding to support its charitable goals. This also means that donors to a nonprofit can often receive tax deductions, incentivizing giving.
Accountability:
Benefit Corporation: The directors and officers of a Benefit Corporation are legally required to consider the impact of their decisions on various stakeholders, including employees, communities, and the environment. However, their primary goal is still to generate profits for shareholders.
Nonprofit: Nonprofits are governed by a board of directors who are responsible for ensuring the organization remains true to its mission. Nonprofits are accountable to their donors, the public, and regulators, and they must adhere to strict rules about how their funds are used, focusing entirely on their charitable purpose.
Profit Distribution:
Benefit Corporation: A Benefit Corporation can distribute profits to its shareholders in the form of dividends, which can be a motivating factor for investors.
Nonprofit: Nonprofits cannot distribute profits to individuals or shareholders. Any surplus funds must be reinvested into the organization’s programs and activities. This is one of the key distinctions that ensures a nonprofit’s commitment to its mission, rather than to individual financial gain.
Why Should You Choose a Nonprofit?
While Benefit Corporations have their place, nonprofits offer several advantages that make them a more suitable choice for organizations primarily focused on social impact rather than profit. Here are some reasons why nonprofits may be the better option for your mission-driven work:
Tax-Exempt Status: Nonprofits, especially those with 501(c)(3) status, enjoy tax-exempt status, meaning they don’t have to pay federal income tax. This can be a huge benefit, as it allows the organization to allocate more funds directly to its mission. Additionally, donations made to your nonprofit are tax-deductible for the donor, which can increase donor generosity.
Access to Grants and Philanthropic Funding: Nonprofits have access to a wide range of funding opportunities, including foundation grants, government funding, and corporate sponsorships that are not available to for-profit entities like Benefit Corporations. Many philanthropic organizations and government agencies only grant funds to nonprofits.
Focus on Mission: Nonprofits are mission-driven, not profit-driven. This means your organization can focus entirely on social impact without the pressure to generate profits for shareholders or investors. As a nonprofit, your main concern is fulfilling your charitable goals, not maximizing financial returns.
Public Trust and Credibility: Nonprofits are often viewed as more trustworthy than for-profit entities because they are dedicated to serving the public good, rather than enriching shareholders. This can help build public confidence in your organization, making it easier to attract donations, volunteers, and support.
Limited Liability and Governance Flexibility: Nonprofits are governed by a board of directors, and liability is typically limited to the assets of the organization itself. Nonprofit boards are also subject to specific governance rules to ensure transparency and accountability. This can offer additional security and structure to your organization.
Conclusion: Choose Nonprofit for Mission-Driven Work
If your primary goal is to create a positive social or environmental impact without focusing on generating profit for shareholders, then forming a nonprofit is likely the better choice. Nonprofits provide tax benefits, access to philanthropic funding, and a clear structure for achieving your mission. They also allow you to focus entirely on doing good, without the pressure of meeting profit goals.
Benefit Corporations may be a good fit for businesses that want to align their mission with social impact, but if your goal is to serve the public good and attract donations for charitable purposes, a nonprofit is likely the right structure. InstantNonprofit can do all the paperwork so you can focus on the good.