What legal structure should you choose when you want to start your do-good project?

Should you start your own non-profit organization or a company?

Everything is communication they say. When you want to create a start-up and show the world that you intend to be a good-doer that is sustainable and conscious, there is a statement to be made already in the legal form you choose. And to get that choice right at the start sure is to be preferred.

The main 2 choices are:

1. A non-profit association (Sw: ideell förening)

2. A limited liability company (Sw: aktiebolag)

So, what message will you send by starting a non-profit organization compared to starting an ordinary company that intends to do good and be sustainable?

Firstly; the objective of your enterprise is up to you and your co-founders (as long as it will be within laws and regulatory requirements). But the 2 legal structures mentioned above have important differences. Legal ones. So let’s do the quick run-down.

1. The limited liability Company (LLC)

In Sweden, we typically do business through a limited liability company.

A company can have a do-good purpose and a sustainability profile, but according to Swedish law, it will at the outset have a for-profit motive. This will be a legal obligation for the company’s board and management to pursue unless the shareholders decide to explicitly state in the articles of association that the company shall have a non-profit motive. The articles must be registered with the Swedish Companies Registration Office and will be public information for everybody to see.

2. The non-profit association

As a starting point, the non-profit association is something of the opposite of the LLC. To call yourself a non-profit you must have an overarching non-profit motive and type of operation. However, as a general rule, you may also have profit-making operations – but only if the profits are reinvested in the association. Focus and the bulk of operations should hence be non-profit work.

So, the legal structure will have effects and communicate different profit purposes.

3. Same for both

Good to know is also that both types of structure are legal persons that can act, enter business relationships, sell, buy, offer, etc. on their own account. (It will not be the founders/owners who are responsible for its obligations but the company itself, as can be the case with other structures.)

4. What message do you send with the choice of legal structure?

There is a communication aspect to this legal set-up that is good to understand, i.e. the why legislators have decided that there is a profit motive to be presumed in the LLC? This is because different types of legal structures should be used to fit different purposes and carry this information. When you – as an external party from the organization at hand – are dealing with it, you should be able to assume certain things based on the structure alone. For instance, as a potential investor, partner, or when taking employment – you should be able to directly make the right assumption about whether the company intends to grow its value and make a profit for its owners or not.

Structuring your business as a company hence communicates to the world that you intend to make a profit/build value into the company unless you actively change this in your articles of association. And a non-profit association tells the world that you intend for any profits that are made to go back into the organization/to other do-good purposes (and not go to the owners etc.).

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