Raising Capital for Your Business Entity

Whether a nonprofit, for-profit, or new entity, the goals of your venture and your plans for fundraising will establish what legal structure your business will have.


| July 2016



Money and business charts

The entity type you choose can impact your ability to keep your values embedded in the business as it evolves.


Photo by Fotolia/Lukas Gojda

A quality food-based business has the ability to provide solutions to our nation’s numerous social and environmental issues. However, entrepreneurs of such ventures have a significant lack of access to the funds they need to get off the ground, let alone grow. Written primarily for people managing socially responsible food businesses, Raising Dough (Chelsea Green Publishing, 2013) by Elizabeth Ü is a guidebook to resources, strategies, and lessons that will benefit any entrepreneur and their supporters, investors, and partners. Ü is a social finance expert, and her descriptions of case studies and personal experience will lead readers through the many stages of a new business, from choosing an ownership model to understanding funding sources like loans, grants, and even crowdfunding. This book is an irreplaceable guide to sustainable finance, and it lays out the tools and planning required to help your small, food-based business launch and thrive.

You can purchase this book from the MOTHER EARTH NEWS store: Raising Dough.

Choosing an Entity Type

Before you begin the process of raising capital from outside investors, you will need to make some decisions about how to legally structure your business. The entity type you choose affects your capacity to fundraise, and not always in the ways that you might expect. “Choosing an entity is about finding the possible in a sea of perceived constraints,” says Joy Anderson of Criterion Ventures, a business that offers what it calls Structure Lab training sessions to help social entrepreneurs consider the benefits and implications of various structures. “Legal structures are often a deafening thud in the moment when people are thinking about what is possible. ‘Really? We can’t do that?’ people say, thinking their venture can’t take grants if it’s structured as a for-profit entity, or that it can’t make a profit as a nonprofit. Often, these statements are radically erroneous.”

The entity type you choose can also impact your ability to keep your values embedded in the venture as it evolves over time. Marjorie Kelly is director of ownership strategy at the consulting firm Cutting Edge Capital, where she works with companies to design ownership and capital strategies that maximize social mission. She is also a fellow at Tellus Institute, where she directs a number of large research consulting projects in rural development and impact investing. “Choosing an entity structure is not primarily a legal exercise,” she emphasizes. “You end up with a legal structure, but it’s really about how you manage human relationships and identifying the purpose of the business. You start there. What are you trying to do?”

There are many for-profit entity options to choose from, each of which might offer benefits in some areas and disadvantages in others. As if choosing an entity structure weren’t confusing enough to begin with, a social entrepreneur can consider additional options above and beyond the usual for-profit models. This chapter covers the basic entity types in three categories: nonprofit, for-profit, and newer social enterprise structures that are available in a growing number of states. You’ll go through a series of questions to help you determine which entity might be the best fit for your venture, given your values and intentions. While the majority of this book is designed to help entrepreneurs who choose for-profit or social enterprise structures, it is entirely possible that a nonprofit might best serve your goals.

Nonprofit Entities

Nonprofit organizations can—and often do—engage in social enterprise activities that generate revenue with the purpose of furthering their charitable missions. Nonprofits can even generate “profits” from their operations, but this net income must be reinvested into the organization to further its mission. There are some major benefits to choosing a nonprofit entity structure, assuming your venture meets the legal qualifications to become one. Eligible nonprofits are exempt from federal and state income-tax requirements, and gifts to nonprofits are tax deductible to individual donors, giving them added incentive to support you. Foundations are far more likely to make grants to nonprofits rather than for-profit entities. The social “brand” of a nonprofit is also immediately clear to prospective supporters: your organization is committed to its mission.





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