We’ll just say it: Non-profits need profit too.
Though popular culture has propagated the idea that profit is a dirty word within cultural, service, aid, and other do-good organizations, producing a profit margin is actually essential to a nonprofit’s ability to pursue its mission. And while non-profits do not distribute profits, the creation of a healthy margin is critical for organizations to avoid a perpetual state of scarcity. Standard sources like revenue generation, endowment income, unrestricted donations, and more can contribute to creating a positive profit that helps not only to offset expenses but to fuel new programs and operating needs.
In order to maximize their profit-generating potential, some non-profit organizations are creating novel hybrid organizational structures with distinct entities to serve non-profit governance objectives and entities empowered to operate like any other commercial business in seeking profit gain. OpenAI and Patagonia are two radically different companies that have both pursued innovative entity structures that feature both nonprofit and for-profit components, seeking to satisfy both mission and money motives.
Specialty outdoor retailer Patagonia made headlines in 2022 when CEO Yvon Chouinard announced that he was donating his interest in the $3 billion company to a new set of nonprofit organizations. While Patagonia is still a for-profit company, 100% of its voting shares are owned and controlled by The Patagonia Purpose Trust, making it the strategic leader of Patagonia’s operations. All profits from Patagonia then go into the Holdfast Collective, which controls 100% of the non-voting shares and invests the proceeds of the company into environmental causes (Cuofano, 2023). Though media and public scrutiny questioned whether the CEO was innovating or avoiding estate taxes with this move, the result is that Patagonia’s oversight structure protects the profit orientation of the core retail operation while newly ensuring the profit is funneled explicitly toward environmental causes in potential perpetuity.
If Patagonia is an example of a for-profit company that morphed into a nonprofit over time, OpenAI may be the opposite case of a nonprofit that appears to be transforming into a for-profit in real time. Founded as a 501(c)(3) nonprofit in 2015, in March 2019 the organization announced OpenAI LP, a self-described hybrid for-profit and nonprofit company which would be hallmarked by a capped-profit company focused on taking on investors and generating profit returns. This new entity would be managed by the original nonprofit OpenAI Inc. and profits in excess of 100X would be used by the non-profit to support education and advocacy with potential annual increases.
Public opinions on these changes varied wildly but ultimately, without ceding its non-profit designation, these changes enabled OpenAI to raise the billions needed to successfully innovate in artificial intelligence and ensure that investors profit in venture capital-like ways as opposed to simply tax deduction-like ways.
Examining each business’s unique structural journey and considering the possible motivations and potential benefits and challenges to each may help in defining critical questions, best practices, and cautions for the nonprofit field. Facing volatile public and private funding, an increasing number of organizations may seek novel structures to enable greater access to profit generation and distribution. While profit margin is a pivotal enabler of non-profit mission delivery, the time is now to consider how to manage the opportunities and risks posed by exploration in profit models and entity organization to ensure this innovation serves to improve and not to reduce non-profit transparency and mission-centered outcomes.
To learn more about Patagonia ? What Happens When a Company Like Patagonia Becomes a Nonprofit
To learn more about OpenAI ? OpenAI Shifts from Nonprofit to Capped-Profit to Attract Capital
