Social Enterprise: An Unconventional Approach for Nonprofits

CEOs of nonprofits have been talking with me a lot about three matters that are weighing heavily on their minds: financial challenges, regulatory change and expansion. It is not news that nonprofits face financial challenges, but the challenges have been gradually exacerbating. They are seeing increased competition for donations, time and attention and, as a result, even maintaining donation levels is becoming more of a challenge. In addition, government funding is getting tighter and, when available, cumbersome to obtain and maintain. Costs are rising, but revenues are not.

New Challenges

Nonprofits in certain fields are facing significant new regulatory changes in addition to the challenging existing regulatory frameworks within which nonprofits generally already operate. For example, the elimination of sheltered workshops is causing significant disruption for organizations that serve adult individuals with disabilities.

In spite of the challenges and changes, some CEOs are nevertheless talking about expansion and new programs. This isn’t easy, especially when resorting to traditional fundraising techniques. As a result, I’m seeing an uptick in the number of nonprofit CEOs who are looking for more creative approaches and solutions.

One unconventional approach is social enterprise. For this purpose, think of a social enterprise as an entity or a division within an entity with the goals of making a profit or using moneymaking techniques and providing a social or public benefit. A social enterprise can generate income for the nonprofits, while pursuing public benefits that complement its charitable goals. In addition, it can potentially attract investment to help secure its own operations and provide more stable money streams to the nonprofit—and do so in a less restrictive regulatory environment. Here are four possible avenues to explore:

4 Possible Approaches

1. Create a joint venture with an existing for-profit entity. A joint venture is a partnership (although typically structured as a limited liability company or corporation) between the two entities for a specific purpose. That purpose might be to expand the reach of one of the nonprofit’s missions or to take advantage of one of the nonprofit’s assets.

As an example, a university that had summer teaching training programs created a joint venture with a video production company. The joint venture took the training programs and broadcasted them to a greater number of teachers versus what could be reached with an on-campus program. The profits from the venture were shared by the university and the video company.

2. Create a for-profit entity. The nonprofit might create a new mission-driven, for-profit entity, such as a benefit corporation. The nonprofit could own all, part or none of the for-profit. If owned, profits of the for-profit could flow through to the nonprofit. If not owned, the nonprofit could have a contract with the for-profit.

For example, Greyston Bakery is a benefit corporation, which is wholly-owned by the Greyston Foundation.

3. Embed the social enterprise within the nonprofit. Rather than create a separate for-profit entity, the social enterprise might be created and operate as a division of the nonprofit, which was an approach followed by ARC of Westchester.

4. Contract with an existing for-profit entity. The nonprofit could have a contract with an existing for-profit, which includes payments to the nonprofit for services or products (such as intellectual property) provided by the nonprofit.

Selecting the best approach will depend very much on the nonprofit’s goals, mission and available resources, among other factors. It is definitely not “one-size-fits-all” strategy, but as with any new venture, careful planning is key.