Non Profit v Social Entrepreneurship
January 7, 2016 10:51 PM   Subscribe

A friend is considering starting a non-profit. Since the beginning, he's been thinking it will be a non-profit but recently, someone who specializes in helping develop social entrepreneurs told him that type structure would be better for this reason ...

She said NP's spend all of their time asking for money from the very people who's sources of wealth depend on shrewd fiduciary decisions that may be very anti no-profit. Plus, she says an NP is always and forever begging and so, always on a financial teeter totter. A social entrepreneur, she says, can fulfill the same mission but not be dependent on begging and pay a salary or have necessary overhead costs w/o guilt. The flip side though, she says, is people trust NP's more and anything connected with a profit, no matter the social good, has a taint. So he doesn't know which way to go.

Any informed help or insight would be appreciated
posted by CollectiveMind to Work & Money (10 answers total) 8 users marked this as a favorite
The first question would be whether the organization would even qualify as a non-profit. (There are some hoops.)

Any business can be a teeter-totter and being an NP doesn't necessarily mean you are always scrimping by. The NP I volunteered for did the usual grants and fundraisers but generally had plenty of money to reinvest in infrastructure and programming, with significant growth year over year and a solid board of directors/community partners who really understood the services the organization provided. (For context, the NP was near a major national park. A significant amount of cash flow came from fees from tourists attending the many educational day and residential programs.)
posted by mochapickle at 11:11 PM on January 7, 2016 [1 favorite]

I have directed two social enterprise and started a non-profit. In the first instance, I would be wary of this advisor telling you this about non-profits. Social enterprise sound amazing but they have serious individual business model drawbacks such as, in the USA, limits on amounts of investment allowed per director for the lifetime of the business.
posted by parmanparman at 11:17 PM on January 7, 2016

Well, is the aim of the organization in line with a social enterprise? Can this organization keep the lights on with revenue from operations and achieve the aims that your friend has? Is this a cause that can attract grant and donation revenue without spending all its time on fundraising?

Social enterprise versus non-profit is just about meaningless without the context of what the organization is trying to do and what the potential revenue sources are. Social enterprise is also a pretty loose term. Non-profits can run social enterprises (i.e. revenue-generating activities); it isn't one or the other.
posted by ssg at 11:34 PM on January 7, 2016 [4 favorites]

Hmm. This persons advice seems biased. Not all NPO s beg. I work for a membership org, which is a non profit and is entiresly funded by member fees. We own a restaurant and have many tax advantages because we can purchase capital from the NPO side (nb. Canadian legal context may not apply to you). However, the restaurant isn't there to make money and it does not.
Additionally there is no agreement on what a social enterprise is. Some are co-ops. Some are non profit-run businesses. Some are businesses run as work experience opportunities for particular communities...

I agree with ssg. It all depends what you are trying to do.
posted by chapps at 12:49 AM on January 8, 2016 [1 favorite]

It's foolish to make blanket statements about what and how "nonprofits" function. That depends more on the operational model that how an organization is incorporated. The only thing that distinguishes a nonprofit from a for-profit is that nonprofits incorporate with paperwork that precludes redistributing gains to directors.

Nonprofits that rely on donations are often begging (the preferred term is fundraising).

Nonprofits that don't, don't.
posted by entropone at 4:45 AM on January 8, 2016

I will assume that your friend is in the US. Some or all of this may not apply elsewhere.

Your friend is getting some terrible advice.

First, if your friend wants to start a business -- something that sells goods or services which are not healthcare or education, to oversimplify -- in the vast majority of cases that business is going to have to be set up (legally) as a business. It can be owned by a charity and that charity can enjoy a mix of pre-tax (via charitable contribution) and after-tax benefits from the success of the business, of course, but the business itself will have to operate on business terms. Google "UBTI" generally to go down the rabbit hole a bit on this one. Social entreprenuership is simply a buzzword for business who adopt specific constraints on their business practices -- ethical sourcing, constraints on pricing, ceilings on executive compensation, floors on non-executive compensation, goods and services they believe are uplifting for their customers, what have you -- in order to fulfill their own or their customers' non-financial aspirations.

Second, if your friend wants to start a charity -- something that (once again, to oversimplify) gives away goods or services or provides health or education services on some basis other than maximizing profit -- in the vast majority of cases that will need to be organized legally as a not-for-profit. You want and need to get contributions and being a charity means that the tax deduction of those contributions amounts to a 50%-100% match from the government which you can directly invest in programs. If you want to be part of a government or broader civic system for distribution or provision of goods and services, you generally can't join the system if you aren't a non-profit. A non-profit is, itself, tax exempt, and that has HUGE implications for the costs of your real estate, the goods and services you buy, and your ability to generate and maintain a surplus (which for a business is taxable). Non-profits can and do pay large salaries to their managers, professionals and executives. Donors to non-profits as a rule are perfectly happy with the non-profit mission -- the entire "official" social life of every big city in the US is organized around philanthropic events where rich people give money to non-profits!
posted by MattD at 5:17 AM on January 8, 2016 [3 favorites]

It's important to note that in theory, any for-profit business model could be a social enterprise. Or, more frequently the term is used to detract potential business competition such as the case of School of Life, which is really a limited liability partnership. She should make clear in the b business plan just exactly what the aims of the business will be in terms of the community benefit but be aware that if the business is doing these activities while for-profit, it may find that it will be taxed for these community benefits as marketing cost, if it is used as essential marketing.

Her challenge in setting up a non-profit is to ensure as immediately as possible that the board is in place to support the endeavour and not simply attend meetings. Most new orgs fail hard first step off the block. Building a non-profit is much harder than setting up a for-profit company and not necessarily something that is going to be well understood by a business development adviser unless they have direct experience of your friend's area of interest. She needs to go to those who have a disposition to the cause first (and maybe always). First to introduce the idea, second to learn about other organisations & individuals, and third, whether it is wise to put heart and soul into the venture.
posted by parmanparman at 9:57 AM on January 8, 2016

someone who specializes in helping develop social entrepreneurs told him

This person is trying to promote their business and cannot be trusted.

We would need details on the specific goals of your friend to be able to give meaningful advice as to whether a business model or a NP model makes more sense.
posted by Michele in California at 12:10 PM on January 8, 2016 [4 favorites]

I've volunteered with non-profits that do very little "begging" (yes, fundraising is the correct term).

They act sort of like a for-profit, funding much of their operations budget through day-to-day "business activities," but give away some things, or charge much less than a for-profit would need to. They do so by relying heavily on volunteers for labor, and by accepting donated goods. They also tend to be community-driven projects with numerous core volunteers driving them forward, serving on the board, filing tax documents...

I also know non-profits that rely exclusively on grants from governments and philanthropic NGOs. And some that rely on extensive fundraising targeted at private individuals, be they wealthy or not.

Being a non-profit means you get some tax breaks, and if people want to give you money then THEY can get tax breaks too, which can be a big incentive for potential donors. It also, as a few folks have already mentioned, means that your activities are limited, usually to charitable/educational purposes.

For-profits can be more agile - they don't necessarily need a Board of Directors, and they can do a wider range of things. They also loose access to many grants and most potential charitable donors - instead they have to seek funding from their own business activities and from investors, who are looking for a return on investment...

So it depends entirely on what your friend's enterprise is, and how they want to operate it. Do they want to worry about fundraising or about profit margins? Do they want to be in charge, or to establish and work with a Board of Directors?

I would definitely take the specialist's advice with a big grain of salt. She sounds like someone with strong unfounded opinions and/or a vested interest in the "social entrepreneur" model.
posted by sibilatorix at 1:50 PM on January 9, 2016 [1 favorite]

It depends also on how they frame the problem space. If you are concerned about the rise in homelessness, you may want to help the homeless. In which case, you are likely talking a not for profit model. Or you might frame it as a desire to reduce the incidence of homelessness. This opens up a great many other avenues to achieving your goal, including starting a construction company and building housing that isn't McMansions. There is an overall shortage of affordable housing and areas with housing prices that aren't just nosebleed prices tend to have a lower incidence of homelessness because fewer people are forced out of housing to begin with.

Some problem spaces do not lend themselves well to a for profit model. This is why things like police and fire are typically handled as public goods. But there can be many different valid approaches to a problem space, some suitable to a business model and some not.

I would be fine with the person promoting their business if they had said "Oh, hey, there is this other model and if you go with that, I do training in that space." The problem is they are trying to convince your friend to adopt that particular model. So, I would not trust them for that reason.
posted by Michele in California at 2:09 PM on January 9, 2016 [1 favorite]

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