Jennifer A. Jones, M.A., Research Associate at the Caster Family Center for Nonprofit and Philanthropic Research.
Social Enterprise. B Corporations. L3Cs. These are a few of the hot buzz words floating around these days. But what do these words actually mean and how can 501(c)3 nonprofit organizations harness the promise of social enterprise?
In the broadest sense of the definition, social enterprises have both a social mission and a market-based mechanism for generating revenue. As the Social Enterprise Alliance indicates: Social enterprises are businesses whose primary purpose is the common good. They use the methods and disciplines of business and the power of the marketplace to advance their social, environmental and human justice agendas.
Social enterprises come in a variety of models, most of which can be distilled down into two main categories: nonprofit or for-profit. This article will offer a brief definition and a few examples of social enterprises within these two categories. For those working in the third sector, it is important to recognize that nonprofits can – and in many cases should – be involved in social enterprise.
Category I: Nonprofit Social Enterprise
Nonprofits have operated social enterprises for decades, if not centuries. In fact, any nonprofit that offers fee-for-service programs or charges an admission price is, in the broadest sense, a social enterprise. These activities generally take place within the umbrella 501(c)3 organization. For example, the San Diego Opera sells concert tickets and Dreams for Change operates a mobile food truck which sells hot, nutritious meals to the homeless. Both are social enterprises, although each has a very different mission.
Nonprofits can also incorporate a separate company in order to raise revenue. For example, Jewish Family Service of San Diego owns two companies, one nonprofit and one for-profit. Both companies accept donations of cars, trucks, vans, SUVs, boats, motorcycles, ATVs, RVs, trailers, and airplanes. These donations are liquidated and the funds distributed to a nonprofit of the donors choosing. Profit generated from the administrative processing is donated to the parent company, Jewish Family Service.
Example #1: Nonprofits engage in earned-income business development. Business can be related or unrelated to mission.
Dreams for Change operates a mobile food truck that sells hot, nutritious meals to the homeless and accepts food stamps.
Example #2: Nonprofits form separate for-profit enterprises to provide revenue.
Jewish Family Service of San Diego owns for-profit company CARS, Inc.
Category II: For-Profit Social Enterprise
In recent years, increasing numbers of for-profit companies are forming or advertising as social enterprises. There are a number of legal structures under which to incorporate, three of which will be outline here. First, for-profit companies of all sorts can partner with nonprofit organizations to engage in cause marketing ventures or campaigns. Susan G. Komen for the Cure is one of the most well-known examples. The Komen foundation partners with several hundred for-profit companies including American Airlines and New Balance. In a cause marketing campaign, there is a formal agreement between the for-profit and the nonprofit. For example, the for-profit may agree to give all or a portion of the proceeds to the charity.
Additionally, there are new legal structures emerging which allow for-profit companies to signal a commitment to a social mission. The Low-profit, Limited Liability Company (or L3C) and the Benefit Corporation are two such structures available. These structures are taxed as for-profit companies and cannot receive tax deductible contributions. However, such corporations can and do explicitly market their charitable activities and, as will be described in the next section, many apply for Program Related Investments from foundations. To date, more than half of the states in the country have approved or are considering legislation allowing companies to incorporate as either an L3C or Benefit Corporation.
Example #1: Traditional business structures engage in cause marketing
Susan G. Komen for the Cure partners with American Airlines (and many other corporate partners).
Example #2: Low-profit, Limited Liability Company (L3C)
Urban Worm Girl is a for-profit consulting company. It also sells products related to in-home composting.
Example #3: Benefit Corporation
CRSURF (Costa Rica Surf) markets itself as an environmentally conscious surf travel company.
Additional For-profit Social Mission Realization Strategies
Regardless of legal structure, there are many ways that a for-profit company can achieve a social mission. One way, of course, is to donate all or a portion of proceeds to a nonprofit charitable organization. This is the model followed by the popular brands TOMS Shoes and Newman’s Own.
An alternative to donating proceeds is to commit to socially conscious business practices. Think, for example, of the many companies committed to selling only fair trade coffee, being ecologically friendly, or hiring disadvantaged populations such as persons with disabilities or formerly incarcerated. This commitment from a for-profit company is, in the broadest sense, a form of social enterprise.
For-profit companies committed to a social mission are eligible to receive low-interest loans and investments from private foundations. Also known as Program Related Investments (PRI), these loans have historically only been offered to nonprofits. In recent years, increasing numbers of foundations are offering them to for-profit companies as startup or investment capital. One example of this is Gates Foundation’s purchase of stock in Liquidia Technologies, a for-profit biotechnology company working on vaccine delivery. The foundation used PRI funds to purchase stock with the intention of influencing the delivery system for the world’s vulnerable population.
Finally, impact investing is an emerging form of social enterprise whereby the donor expects to make a profit from their philanthropic investment. One example is the emerging Pay-for-Success or Social Impact Bonds (SIBs). First introduced in the United Kingdom in 2010, SIBs are still a relatively new form of philanthropy designed to fund long-term pilot projects based on promising but untested practices. A donor/investor contributes the initial funds. A nonprofit carries out the project. An independent evaluator evaluates the project. If the project is successful, the government repays all or part of the investment to the donor/investor, usually with interest. Success metrics are predetermined by all parties. Goldman Sachs launched the first SIB in the United States. Their $10 million is aimed at reducing the recidivism rate for adolescent offenders at the Rikers Island correctional facility.
Method #1: Profit distribution to nonprofit organization
TOMS Shoes donates one pair of shoes for every pair purchased.
Method #2: Socially conscious business practices
Starbucks is committed to fair trade coffee and benefits for employees.
Method #3: Program Related Investments (PRI)
Liquidia Technologies: Gates Foundation used PRI funds to purchase stock in a for-profit biotechnology company working on vaccine delivery.
Method #4: Impact Investing
The Acumen Foundation’s website states that $13 million in cash has returned to the foundation from social investments such as $600K invested in India-based, for-profit company WaterHealth International which provides safe drinking water for the poor.
As you can see, social enterprise takes many different structures and can be effective for nonprofits of different subsectors and budget sizes. Social Enterprises can be as novel as a $10M Social Impact Bond or as “routine” as the beloved Girl Scout cookies.
It’s also important to remember that nonprofits have operated social enterprises for many years, long before any of today’s buzzwords were created. The category of social enterprise, in the broadest sense, includes any agency that has a fee-for-service program such as hospitals, clinics, theaters and museums. In fact, your organization might already have a social enterprise venture. If so, we’d like to hear from you.
What has been your experience? Please share in the comment section below.