Believing in something so strongly that it’s worth creating an organization for is a great foundation for success. That passion, dedication, and clear vision can be harnessed to do extraordinary good in our world. An idea and commitment may be enough to have a profound impact on an individual, say through a GoFundMe campaign for an ill relative. Our world is full of causes worth fighting, from climate change to inequality to racial justice and beyond. These small scale efforts will not give us the opportunities for a brighter future.
You already know all this, that’s why you’re here. The systemic change we need will come from the same places it always has, through collective action starting from grassroots movements and ideas. Purpose Forward is a Canadian not-for-profit corporation with a mission of helping these organizations accelerate their growth while building resilience, and we’re here to help. Now that you’re ready to register an organization to start fighting for your cause, you will need to think about what type of social purpose organization is best suited for your situation.
In our first ever blog post here at Purpose Forward, we’re going to explain what you should consider when starting your social purpose organization in Canada, and whether you should register as a not-for-profit, charity, or for-profit social enterprise corporation. Each of these groups has an important role to play in our ecosystem of social progress, and we will highlight which of these types of organizations might be best suited for you to maximize impact.
Disclaimer: There are unique considerations for each situation. By continuing through this article, you acknowledge that this material is provided for informational purposes only and is not intended to replace professional legal and/or accounting advice. These professionals are important partners in your journey to success, and we encourage you to begin fostering these relationships very early on.
What is the difference between a non-profit organization and for-profit social enterprise?
Before getting into this, it’s important to clarify that there is no certification or other mechanism that is officially recognized by the Canada Revenue Agency (“CRA”) to establish an organization as a social enterprise. The social purpose space is rapidly evolving, and some provinces are beginning to look at this more closely. As of 2021, there is no special status afforded to a for-profit social enterprise that would give it any additional legal or tax privileges over any other profit generating business. A broad definition of a social enterprise would be that the primary reason of existing is to serve some social objective or common good rather than generating profits like a traditional business would. From a practical standpoint though, a for-profit social enterprise still has to pay income taxes, and depending on the structure there may be shareholders that generate a profit like with other businesses.
On the other hand, a non-profit organization does not typically pay income tax, and the income cannot be used to personally benefit the members. It’s important to note here that the definition of a non-profit does not prevent it from generating income at all, just that this income cannot personally benefit members. It is perfectly normal for many non-profit organizations to generate a profit that then gets reinvested into the work of the organization and/or a related cause. Not-for-profit corporations may also have capital requirements, such as purchasing a new building or modernizing the technology, and they can justify generating income for several years to pay for these projects. Another important difference is that a non-profit corporation must have at least three directors while a for-profit can have just one, which can be the same person as the owner.
So this all sounds great, right? Saving the world, not paying taxes! Why would I want to start a for-profit business then?
There are a few important considerations for deciding whether a for-profit social enterprise (remember, this legally just means a for-profit business) is right for you:
- Is your solution very capital intensive where it requires a lot of money up front without delivering a public benefit for a long time? Private equity and traditional lenders (i.e. banks) are often more likely to consider significant investments of money if they can see a return on investment, causing non-profits to be perceived as higher risk borrowers as a non-profit may not be able to raise the necessary capital. Lenders can also be reluctant because they don’t understand the different funding models that apply to most not-for-profit organizations. A fascinating example of this is OpenAI, formerly an American non-profit that in 2019 switched to a for-profit corporation to raise the capital they needed to do the research that they are focused on in artificial intelligence. It’s true that most of us do not start with $1 billion and then need to raise another billion for our ventures, but housing projects are common and more realistic examples of where lenders prefer for-profit models in our day-to-day experiences.
- Is your idea likely to be very profitable? If you have a disruptive solution that could generate really significant profits that are not necessary to address the same cause, it might make more sense to setup a for-profit corporation. You can make a comfortable profit off the idea, the taxes you pay can have a significant impact on the communities you operate within, and you can donate to the causes you care about.
- Do you want to keep complete control of your vision? Soliciting non-profit boards (most non-profits tend to be soliciting) require at least 3 directors, at least 2 of which cannot be employees or affiliates. This means that some of the most consequential decisions are to be made through more collaborative and democratic governance processes than just by the owner.
Here is a summary of what we’ve learned so far about a non-profit vs. for-profit entity. Here at Purpose Forward, we believe a picture tells a thousand words so we use a lot of diagrams in our work.
What is the difference between a not-for-profit organization and a charity?
The language can be confusing here since not-for-profit corporations and charities both have an obligation to operate in a way where they don’t earn a profit (i.e. operate on a non-profit basis) and so the terms are often used interchangeably, even within the sector. Charities and non-profit corporations are different though, and according to the CRA:
“If you are operating as a charity, you cannot be considered a non-profit organization, even if you are not registered or cannot be registered as a charity. You can only meet one definition, not both.”
Canada.ca
An important benefit of being a charity is the ability to issue charitable donation receipts so that donors can claim any donations to save on their taxes. Some industry benefits may also be limited to charities, such as potentially qualifying for additional foundation grants or discounts on technology. As you’re starting your new venture, it is important to think about whether you anticipate donations to be an important part of your revenue-generation strategy. If so, you should consider establishing a charity if your organization’s purpose benefits the community.
While the process of incorporating a not-for-profit and a for-profit corporation is very similar, registering a charity includes an application that must be approved by the CRA to obtain charitable status. There are differences in sales tax rules, reporting procedures, and other operational factors as well. Typically, a not-for-profit corporation is slightly easier administratively than a charity, and if donations are not important to your business model, you may want to choose to operate as a not-for-profit corporation.
When deciding whether to apply for charitable status, we encourage clients to focus on whether their purpose meets the CRA criteria for a charity and whether donations are going to be an important tool for raising funds in their organization.
Here is a summary of the relationship between for-profit social enterprises, not-for-profit corporations, and charities.
Choosing the right social purpose model for your cause
Now that we’ve reviewed the differences between a not-for-profit corporation, registered charity, and social enterprise, let’s summarize what we’ve learned in a decision tree.
Thank you for your commitment to making our world a better place, and we hope this information has helped you start on your journey towards setting up a social purpose organization!
Contact Purpose Forward for a consultation on what the appropriate structure might be for your Canadian social purpose idea. We can provide some support and help refer you to experts that specialize in the social purpose space!