Advantages of a for-profit structure

In my last month's article, I discussed learnings from the book ‘Uncharitable’ by Dan Pallotta. The book is a thorough and robust rethink against measuring charity efficiency and effectiveness by one statistic: the ratio of Overhead to Revenue. Dan also points out the many unnecessary constraints placed on charities to optimize operations compared to freedom enjoyed by for-profit companies.

Concerning Ben's Way Funds Generators[i], I conclude from Dan's book that a for-profit model would be more advantageous than Ben's Way adopting a non-profit approach.

This article dives deeper into examining why a for-profit may work better for Ben's Way. We'll look at the impact of using a for-profit for each of our potential stakeholders: seed funders (the donor/customer), management, suppliers, investors, social purpose organizations, competition, government, charities, and future generations. Here we go:

 Seed Funders

Seed funders will differ from charity-only donors in contributing to a Ben's Way Funds Generator. These seed funders will have the hope, belief, and determination to make a more significant personal impact than today's society permits. The seed funder sees the value in not just permanent ongoing funding but increasingly more significant ongoing funding, using any available means to magnify their impact.

Seed funders, I hypothesize, will be open to trying new approaches if they can trust in the approach, feel the hope, and see the work built into stewarding each contribution.

Hearing that Ben's Way services will operate on a for-profit model will throw the seed funders used to giving to charities for a loop. First, there will be no tax-reducing credits. Second, the corporation providing the service will make a profit. These two drawbacks could dissuade many donors from using Ben's Way to give to charity.

Still, the risk is low because the amounts of funds contributed to Ben's Way's long-term funding of charities are relatively small compared to the same donor's overall charitable gifts. 

Therefore for seed funder support, a for-profit model must demonstrate it is:

• the only way possible to deliver donation growth. A for-profit can accumulate capital, but non-profits cannot. Many forms of enterprise can't accumulate capital because of tax law prohibitions.

• able to last generations, with proof [ii]. For-profit flexibility is an advantage.

• trustworthy, with robust examples how the business earns such trust.

• worth a shot, as the risk can be lowered by returning seed funds back to the charities asap. After the initial seed funds are paid out to charity by Ben's Way funds, the remaining invested funds no longer subtract from the original donation.

• able to create significant hope for us now, and for future generations. Seed funders create hope by beginning an ever-increasing and repeating payout stream.

Recognizing today's urgent needs for charity, we advocate giving in balance, proposing that no individual donor into this long-term program give more than 25% of their planned charitable giving. 

Let's estimate that the average seed fund gift is about 10% of the funder's major/legacy giving plans. If the legacy gift is 15% of an estate , then the proposed seed funding represents about 1.5% of a seed funder's total estate. This small portion of wealth will not be essential for funders to live on. Giving seed funds immediately is possible and desirable: the earlier the contribution, the sooner the payouts begin.

Management

The internal management and board of directors of a for-profit have many more tools available than a non-profit.

Management can raise funds on capital markets, as they can promise a financial return to investors. They can contract their services in perpetuity. Overhead ratios are monitored but are not the sole measure of success. Instead, management governs by following sound business practices regarding salaries, advertising costs, etc. A for-profit enterprise can take any form of action if an expense, product, or operation helps propel the business. Franchising may be of interest as a marketing strategy, which is also allowed with for-profits.

That said, the management of a Ben’s Way Funds Generator will be on notice to keep the promise of delivering future pay outs while exhibiting stability and trustworthiness to seed funders. Essential to program success, there must be no hint of self-dealing.

Suppliers

Envisioned suppliers to Ben’s Way include strategists, lawyers, accountants, marketers, website providers, financial advisors, and investment management firms. None of these entities would likely have concerns about whether they deal with a for-profit or a non-profit.

The supplier to a non-profit is often asked to provide free or in-kind services. This is standard practice and acceptable in proportion but can wear thin on a supplier’s generosity, especially when large requirements arise. A for-profit does not expect free services from suppliers and must only spend what is needed.

A for-profit can responsibly spend or do whatever makes sense for the business and the public, without significant backlash. Investors monitor performance closely.

Ben’s Way Funds Generators can also provide service to suppliers by enhancing the supplier’s corporate purpose. If a supplier's company declares support for say, cancer research, a small portion of the supplier's annual giving could be directed to multi-generational growth giving via Ben’s Way for cancer research and treatments in future.

Investors

To get Ben’s Way off the ground will require investors. Investors in start-ups are looking for significant returns. A for-profit structure provides such an opportunity, while non-profits do not. That said, positioning a Ben’s Way Funds Generator start-up investment as a social impact investment opportunity allows investors to consider lower than maximum profits.

The eventual plan would be to buy out the investors, like paying back a debt. Indeed, loans or loan guarantees vs equity may be the primary source to get the business going. Once a certain portfolio size threshold is achieved, the annual profits from investments will cover expenses, and then investment loans can be repaid with after-tax profit.

Note that nothing prevents seed funds from coming in from foreign sources, nor do I envision any concerns about providing money to foreign charities (duly registered). This means the source of portfolio funds could be the entire globe, making a feasibility threshold portfolio size of $50 million seem much more achievable.

Social Purpose Organizations

For-profits have fewer restrictions on investment selection vs non-profits.

A Funds Generator will build a sizeable growing investment portfolio. A portion of that portfolio could likely accept a lower profit target if investing in projects with SPOs (Social Purpose Organizations) such as charities, non-profits, social enterprises, co-operatives and other social purpose organizations in accessing flexible financing opportunities.

Greater access to social finance for SPOs through Ben’s Way will help them grow, innovate, and enhance their social and environmental impacts. A for-profit enterprise will have complete flexibility to embrace such socially advantageous investments. SPO investments by Funds Generators reduce concerns the funds are not helping society in the present.

Competition

As we explained in last month's article, encouraging competition is not typical in a for-profit scenario. However, in this case, when a movement is what we hope to inspire, having as many voices touting this opportunity as possible is helpful.

Furthermore, franchising regional efforts can bolster getting the word out and provide some mitigation against theft. The concept franchising offers is the ability to spread out business risks and to centrally cross-register seed funders’ wishes. If one franchise fails, their supported wishes can be proportionally continued by all the rest, thus acting as a kind of delivery insurance to the seed funder.

Government

The government has much to gain from using a for-profit model. First, when seed funds are given, the government gives out no tax credits, and the Ben’s Way Fund Generator for-profit must pay tax on the net revenue from selling the service. Furthermore, the Fund Generator as a for-profit pays annual tax on the investment gains realized.

The government cumulatively benefits by about 10% of the total cumulative payouts to charity. The resultant millions the government 'receives' can be directly used for more social initiatives.

Some seed funders may bridle at the idea of helping the government. But consider this: today, annual charity donations of roughly $10 Billion are a small slice of charities' $300 Billion sector. The government contributes $200 Billion or two-thirds of the funds. Helping the government does help charities.

Long into the future, when the charities are nearly self-sufficient in funds because of more significant ongoing donations, the government may feel less funding pressure for some charitable causes. This allows the government to give more attention to other less well-financed areas, thus becoming more and more responsive to its constituents.

On the bright side, if governments like the ongoing savings of tax credits and cash from annual profits, they may be more inclined to protect Funds Generators.

Charities

Today, charities get much of their funding from for-profit companies directly, their employees and owners of those companies. So, charities should have no issue with receiving money from a Ben’s Way Funds Generator that is a for-profit, except for one thing...

Charities do not relish waiting decades for funds. Established charitable foundations are being encouraged to spend funds now vs later. Ben's Way requires setting aside some money that could have been useful today to build vast amounts for later. Even if that money is to help charities become financially independent, waiting until decades, even centuries pass, is not seen as a help to today's charities. It seems so very far-fetched as to be not worth thinking about. Thus, charities are not demanding the creation of Funds Generators, a central reason no existing service offers a way to establish long-term funding.

Ben's Way Funds Generators advocate and stress that ‘balance’ is critical. By balance, we mean the largest sums today should go directly to charities, but small portions should be flagged for the future as seed fund contributions. A huge seed fund donation of $100 million represents a tiny portion (0.1%) of Canada's annual $10 Billion donations.

An earlier article explains how charities could become financially independent with minimal investment given sufficient time. A contribution of 5% of revenue set aside as seed funds by about year 114 could annually generate 125% of revenue. Plus this amount repeats every 12 years, so the charity is poised to grow significantly afterward.

Since 5% of revenues in one year seems too large to contemplate, perhaps slowly accumulating 0.5% as seed funds over ten years is more realistic. The seed fund's actual amount is not critical; when it starts, that is most important.

Future Generations

Just as charities desire funding today, future generations will desire funding for their charitable purposes in their day. While we can’t envision their specific charitable needs, we can imagine lots of money from a for-profit company would be very welcome.

Ben Franklin provided proof of future usefulness. When his company was wound down in 1990, two hundred years after the start-up, as you may have imagined, there were many proposals to use the funds. [iii]

Indeed, without an infrastructure such as Funds Generators repeatedly donating enormous funds to charity, how else can we expect future charities to become more financially independent?

Conclusion

Using a for-profit structure for Ben’s Way Funds Generators is required by law to start an organization that can accumulate large sums.

After reviewing the impacts across each of the above key stakeholders, almost all are unaffected or could be expected to be supportive. Charities may not prefer to wait, but that concern is not affected by whether the Funds Generators are for-profit or non-profit.

Seed funders may have difficulties with a for-profit Funds Generator via delays and tax impacts on possible donations. Success will depend on seed funders developing a favourable opinion of what Funds Generators can accomplish for their legacy.

Funds Generators offer seed funders a way to help today and tomorrow. Seed funders create hope now and even more hope for the future by setting up Funds Generators.

[i] A Ben’s Way Funds Generator is a proposed organization that invests contributed seed funds to grow over the vast time horizon ahead. At various preset payout periods or target amounts, the organization repeatedly gives portions from the investment portfolio per funders' wishes to charity. Using the infinite time after we die, society should invest funds to grow more new charitable donations. This creates a repeating Funds Generator for charities.

The term Ben’s Way is to attribute the inspiration for Funds Generators to Benjamin Franklin. Franklin set up a social impact loan business to last 200 years after his passing via his Last Will and Testament. The business was to lend money to young apprentices from 1790 to 1990. Ultimately, Franklin's donation and legacy of social impact investments compounded his seed funds into major gifts to Boston and Philadelphia at the 100- and 200-year mark. In 2022 dollars, his roughly $283 thousand invested in 1790 grew to become gifts in 1890 of $11.2 million and $13.9 million in 1990. Learn more here.

[ii] An article here explains why and how a Ben's Way Funds Generator can last as a multi-generational company. 

[iii] From Ben Franklin, a Gift That's Worth Two Fights - The New York Times (nytimes.com) (Warning - paywall)

Photo by Nataliya Vaitkevich