Accounting & Taxes for Social Enterprises: Your Journey Starts Here


Accounting & Taxes for Social Enterprises: Your Journey Starts Here is a guide that forms part of the Social Good Guides, a series of essential small-business guides created for startup changemakers produced by the Social Innovators Collective. Authored by Aaron Fox, Senior Manager at Raffa, PC, and Susan B. Hepner, Partner, this guide discusses setting up your accounting and tax operations, for success as well as compliance. Some of the insights offered in this guide include tax-exemption strategy and how to utilize other organization’s tax filings to guide your enterprise. It also includes a sample budget and initial accounting checklist.

Even 501(c)(3) charities need to file a tax return. Just because you are tax exempt doesn’t mean you are exempt from reporting accurate information to the government.

Below is an excerpt from the Q + A section of the guide.

Social Good Guides (SGG): What items would you put on a checklist regarding accounting for a startup changemaker?

Aaron Fox (AF) and Susan B. Hepner (SH):

• Decide to be nonprofit, for-profit, or hybrid organization
• Choose a legal structure, e.g. Nonprofit vs. C-Corp
• Enlist board of directors
• Incorporate or become an unincorporated nonprofit association
• Draft bylaws
• Apply for an Employer Identification Number (EIN)
• Apply to the IRS for nonprofit exemption if applicable
• Register with state
• Choose accounting method and system
• Develop accounting manual
• Develop corporate policies
• Hire employees
• Draft budget
• Make tax payments
• File annual tax returns

SGG: When is it time to call in a financial consultant or accounting professional?

AF: Most new entrepreneurs find out very early on that it’s difficult to build a social enterprise on your own without any prior experience. Truly novice entrepreneurs should have a sit-down with an experienced professional to go over the business plan in order to identify shortcomings and weaknesses. Usually around the time the organization starts to incur some volume of revenue is when the more thorough help from a professional is needed, whether that be in setting up an accounting system that makes your life easier and produces helpful reports, helping the organization fundraise to large foundations, or just establishing good internal policies. Don’t wait until it’s too late to ask for help. There are plenty of service providers out there willing to provide some quick answers and point you in the right direction.

SGG: How do you recommend startup nonprofits and for-profit social enterprises go about qualifying accounting professionals for their needs, and how might that process differ for the two?

AF: An accounting firm, first and foremost, should be experienced in the industry or specialty in which your organization operates. It’s especially important in the beginning to work with someone who understands what you are trying to accomplish and has a track record of being able to make that happen for clients. Ask as many questions as you feel necessary during the up-front meeting. New for-profit businesses are far more common than their nonprofit counterparts, so if you are sure becoming a nonprofit is the best path for your new endeavor, you should be more selective on who you work with to ensure they know what they are doing. Ask your provider for references, and benchmark multiple providers to find the right one.

SGG: Under what circumstances would you recommend a startup choose to pursue tax-exemption?

AF: If the organization thinks its activities will qualify it for federal tax-exemption, it should take advantage of this highly sought-after status. The activities that would qualify range from educational, charitable and scientific to representing business industries and promoting social welfare and the common good. However, if the founders of the organization have plans to gain financially from the business, either through selling the business in the future for a profit once it has been established or by taking the enterprise public, the tax-exempt nonprofit structure is not ideal. This sort of private benefit runs contrary to how nonprofits should operate. Still, there are a range of good options for social changemakers to consider that aren’t nonprofits but still act socially responsible and achieve a purpose other than profit.

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