Choosing non-profit vs. for-profit status


Launching a publication?

Try Pico

Earlier this year, the Knight Foundation surprised the media industry when it announced it would dedicate $300 million to local news initiatives over the next five years. While Knight has given tens of millions of dollars to journalism organizations in years past, this was, by far, its largest investment yet. The news came in the wake of announcements from both Google and Facebook that they were also each investing $300 million in local news projects. That’s nearly a billion dollars dedicated to local news.

But while institutions like the Knight Foundation do sometimes award grants to for-profit media companies, the vast majority of projects it funds are run by nonprofits. In fact, any media organization, local or otherwise, that seeks out foundation grants will find that it’s much easier to win those grants if it can claim nonprofit status.

Which begs the question: given the economic headwinds that the media industry faces, should emerging news organizations launch as for-profit entities, or should they go the nonprofit route? There are various factors that should be considered before making such a decision.

Funding

Probably one of the most important variables in your decision is how you plan to fund your journalism, both in the initial launch and as an ongoing concern. No matter how large your media organization, you’ll likely require at least some startup capital to get going, and both nonprofit and for-profit organizations can attract different types of funding.

The upside for for-profit companies is that they can take on investors. By relinquishing some equity, media outlet can raise the necessary funds to hire a staff and build infrastructure. Nonprofits, on the other hand, can’t relinquish equity and are therefore unlikely to attract the kind of investors that a for-profit entity can.

That being said, the experts we interviewed for this article noted that investors aren’t exactly falling over themselves at the moment to fund news. “I'd be hard pressed to name many people who are investing in media right now,” said Fran Scarlett, director of programs and services for the Institute for Nonprofit News (INN). “I mean, at this point, you've got to be doing something pretty spectacular [to attract investors].”

For-profit companies aren’t precluded from accepting donations or foundation support, but they’ll have a much harder time doing so. Establishing your organization as a nonprofit will make it much easier for you to pursue this type of capital. “Foundation funders and other major donors are really committed to strengthening the field of independent news and public service focused journalism,” said Scarlett.

In fact, the Knight Foundation set up a fund specifically for backing these kinds of nonprofits. Launched in 2016, the Knight News Match takes individual donations and matches them up to $1.5 million. According to Scarlett, INN members raised over $7.4 million by leveraging News Match. Meanwhile, the American Journalism Project, a new, high-profile fund backed by Knight, Emerson Collective, Arnold Ventures, Craig Newmark Philanthropies, and the Facebook Journalism Project, engages in what it calls “venture philanthropy,” seeking to capitalize the most high-impact journalism startups – but those startups must be nonprofits.

Though foundation support can provide crucial capital for a nonprofit, that doesn’t mean that a news organization can solely rely on it. “Nonprofit funders, even once they initially give a lot of money to get things started, want to get to the point where major donors are as little as a third of the revenue that you use to cover costs,” said Tom McGeveran, a partner at Old Town Media, a company that advises media outlets. In other words: choosing to be a nonprofit to avail yourself of grant funding is a reasonable strategy, but it won’t obviate the need to develop alternative business models, which may or may not be better served by that corporate form.

Perceptions

Technically, just about any business model can be adopted by both nonprofits and for-profits. Even though membership programs are sometimes associated with nonprofits, they can be embraced by for-profits, and there are plenty of nonprofits that accept advertising and place subscription paywalls in front of their content.

In the end, the business model you embrace will be based on the perception from readers and what they’re willing to tolerate. “Most of the nonprofit news organizations have a mission that's focused on the public good,” said Scarlett. Donors want to be made to feel that they’re making a difference in the world. “The funding is going to go to things that are successful and have impact,” said McGeveran.

Timing is also a factor. Foundations tend to shift the focus of their support depending on their perceptions of where it’s needed. “Foundations are very much focused on local right now,” said Scarlett. “That's one of the things they're really gravitating towards because of this increasing number of news deserts that are showing up.” Hence the aforementioned investments from Knight, Google, and Facebook.

Media outlets that don’t feature cause-based content might be better suited for for-profit status. “If you're a general interest magazine covering culture and arts, I think that you have to have some other additional element for the nonprofit route to work because these days, there are a lot of people that need that money, and showing some sort of mission that impacts the lives of people in the community [is essential for nonprofits],” said McGeveran.

And even though there certainly are nonprofit newsrooms that employ subscription paywalls, McGeveran said that he’d caution against a nonprofit news organization rolling out such a product. “Sometimes that can be viewed as in conflict with the goals of nonprofit funders … because they feel like if they're contributing to it, then it shouldn't be that only some elite number of paying customers can actually read this stuff.”

One critical exception? News outlets looking to make political endorsements. Nonprofits are barred from it, so even if you plan to act ‘in the public interest,’ you’ll have to go the way of Santa Cruz Local, which ultimately set up as an LLC.

Bureaucracy and costs

How much control do you want over your news organization’s direction? And how quickly would you like to get it off the ground? “Sometimes the path to capital for a for-profit can be quicker,” said Chris Krewson, the executive director of LION, a national nonprofit that helps local journalism entrepreneurs.

For-profit entities are typically easier to get off the ground -- it takes just a few hundred dollars to file in Delaware. There’s also the potential for more scalability; it’s doubtful that companies like BuzzFeed or Vox could have grown as quickly as they did if they had been established as nonprofits.

It’s worth noting, however, that if you do take on investment, you may have to establish a board of directors, and if one day you go public or are acquired by a public company, your news organization will be subject to certain transparency regulations in its quarterly filings.

Nonprofits take significantly more effort to get off the ground. Krewson explained that the bar to entry is much higher for nonprofits, with multiple levels of red tape and paperwork required for an organization to obtain 501(c)(3) status from the IRS. For instance, you’re required to establish a board of directors and file regularly with the IRS. There are rules barring you from political advocacy, and you’re subject to various transparency requirements, including one that makes executive salaries available to the public. “Nonprofit funding also tends to have more strings and can take a longer time,” he said.

Of course, there are ways to speed up the process of achieving nonprofit status. Some news organizations seek out fiscal sponsorship from an already-existing nonprofit. This entity takes on the administrative duties, from managing back-office functions to processing charitable donations. This can take a huge administrative burden off the news organization that adopts it, and it makes it easier for new entrants to test out ideas and fundraise fairly quickly. But it’s worth pointing out that these fiscal sponsorships often come with hefty fees, either charged upfront or taken out as a percentage of donations. “Don't underestimate the difficulty and expense of being a nonprofit,” said McGeveran.

What about B-corps?

There is a third option, what some would consider the best of both worlds. Benefit corporations aren’t as well known to the public, but we’re seeing more and more organizations adopt this model, which is legal in several dozen states.

For the uninitiated, a B-corp is a special designation that indicates a company operates as a for-profit business but also considers it its mission to act within the public good. These are mission-driven organizations that aren’t oriented solely around generating a profit.

Because B-corps are mission-driven, both foundations and small donors may be more likely to give them money, but they also have the flexibility to test out business models that are best suited for for-profit companies.

But it’s also worth recognizing that B-corps could face headwinds during their attempts to fundraise. Because they’re technically for-profit entities, they’ll be barred from applying to grants that are specifically targeted to nonprofits, and it’s not uncommon for investors to be turned off from a company that isn’t focused on maximizing shareholder value.

However, McGeveran argued there are certain types of investors that may be attracted to a B-corp. “The kind of people who invest in media properties are investing in it because they like the space, not because they expect their massive returns,” he said. “So making it explicit can just make everybody a lot more comfortable.”

Ultimately, the decision will come down to which structure will best serve your readers. It’s not exactly a rosy economic climate for news right now, and as we head toward a possible recession, both nonprofit and for-profit media orgs will likely feel the squeeze. With more and more news outlets scrambling for fewer resources, it’s more essential than ever for news outlets to assess their strengths and play to them. Perhaps Krewson put it best: “Regardless of how you incorporate, you still need more money coming in than you have going out.”

Want to dig deeper? In our Winter Quarter issue, we’ll be publishing a detailed side-by-side comparison of what is and isn't possible with different tax statuses and relative costs, with examples of each. Subscribe below to make sure you’re the first to know when it’s available!


Can’t wait? Read Elia Powers 2018 MediaShift piece: How Digital News Startups Choose Between For-Profit and Non-Profit Status.



Other Articles from This Issue

All issues

Subscribe to
The Byline

Get our weekly newsletter! Actionable guides and advice for running your news and media business.