Turning Nonprofits into For-Profits

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Crafting such ad hoc solutions can be unwieldy—and expensive. "We had lawyers for the nonprofit, we had lawyers for the for-profit, we had lawyers for the investment group, says White-Kjoss." Bikestation's officers were careful to get an independent valuation for the intellectual property they licensed to avoid any appearance of self-dealing. In addition, they incorporated the new company in New York rather than California, because New York is one of 31 states with a "corporate constituency statute." Such laws let company leaders consider the interests of other stakeholders—such as employees or the community—in addition to the narrow financial interest of shareholders.

Of course, approaches to business structure vary. Some nonprofits control 100% of the for-profit enterprise. For example, the Mozilla Foundation formed a corporate subsidiary in 2005 to handle the development, marketing, and distribution of the group's open-source software, like Firefox, with revenue flowing to the foundation to support Mozilla's open-source mission. Other models split financial returns with outside investors but retain control of the mission through special classes of stock or other agreements written into the company's governing documents. Lee Zimmerman and Brian Anderluh bought Evergreen Lodge, an historic tourist lodge on the edge of Yosemite, in 2001 with a plan to start a summer jobs program for young adults from the Bay Area. They formed an LLC and raised $15 million in debt and equity from socially minded investors like Pacific Community Ventures and Juma Ventures, both nonprofits.

Zimmerman cautioned investors that returns could be diluted because of the company's social mission to hire disadvantaged youths, but he's not certain they will be. "I think that long term we will be able to fund this program and provide near-identical returns as an entity that didn't have this social program," he says. To reassure investors, however, Evergreen Lodge offered to return the initial capital invested once the company could afford to replace it with debt—which Zimmerman expects to happen in two years. Investors will retain ownership and still receive dividends, but they'll be able to get their original money out without selling the company. Since buying the lodge, Zimmerman and Anderluh have expanded it from 18 cabins to 90 and increased revenue from $500,000 in 2001 to $5 million in 2008.

For Bikestation, the for-profit model is paying off as well. The new company has increased staff from 10 to 14 and is helping to open four new transit hubs this year, bringing the total to 16. Bikestation won't disclose revenue, but White-Kjoss says it has raised projections for 2009. The company is expanding beyond its traditional customers—cities and transit agencies—to market to universities, corporate campuses, and other developments. "We're able to do what we've been wanting to do for a long time," says White-Kjoss.

Tozzi covers small business for BusinessWeek.com.

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