There are four components to a hybrid organization:
- Involves both a for-profit and a nonprofit entity.
- Shares the same or similar purpose.
- Is controlled by a common group.
- Has an interest to raise money from investment monies and from charitable contributions.
From a financial standpoint, the benefits of a hybrid are strong. Some people feel particularly motivated to give to a cause and need no reward. However, there are others who like to give money for a good cause, but want a financial benefit.
When an organization is trying to do good, you want to approach both sources of revenue. A charity cannot get investor money, and a for-profit cannot get charitable contributions. The only possible solution is to form a hybrid.
A good example of a hybrid would be an organization advancing green energy, where one portion of the entity is a nonprofit engaged in energy research and the other is a for-profit engaged in consulting. Both are trying to advance the environment so they share the same purpose, and they’re both controlled by the same group of people.
One drawback to hybrids is you’re going to be scrutinized more by the IRS. And more scrutiny means more expense, more management and the need for more sophistication.
The footwork of setting up a hybrid can be more or less complex. If you’re starting from an existing nonprofit, the board could potentially ratify a for-profit division.
It’s preferable, however, to create a hybrid from scratch and to get IRS approval of your particular model.
There are usually agreements, licensing, and provisions governing the sharing of the organization’s facility between its nonprofit and for-profit branches. So you will want to hire a lawyer or have a good one on your board.
Kent Seton is CEO of the law firm Seton & Associates in Beverly Hills, and co-founder and CEO of the Center for Nonprofit Creation.