When getting ready to start a socially-minded project, the question always comes up if it should be a non-profit, social enterprise, or some sort of hybrid. The women I work with ask me this all the time, so I thought I’d dedicate a blog post to shed some light on the topic!
Let's clear up some misconceptions
First, I want to mention that a "non-profit" usually refers to a 501(c)3 tax-exempt charitable organization, and a "social enterprise" often refers to a for-profit business entity with a social mission. However, a social enterprise can also be a non-profit especially if there is some type of product or service offered.
Non-profits are often thought of as running ineffectively and that they are not business-minded. From personal experience, I was very against starting a non-profit in the beginning because I had worked with several NGOs, non-profits, and government organizations, and I had experienced inefficiency and bureaucracy first hand. But then I realized that my non-profit could be different-- that it could be run like a business so that we can make the most social impact possible.
Do non-profit founders earn a salary?
Non-profit staff and founders typically earn a salary, but all of the “profits” need to be reinvested into the mission of the organization and cannot be used to boost salaries. For-profit social enterprises have more freedom to use their best judgement on how to use their profits. They can put it towards their salary, back into the growth of the organization, or towards social programs. Several social enterprises that I know have a set salary similarly to a non-profit, and if they make extra profit one year, that money is reinvested into their social programs as well, but the difference is that they have the freedom to choose to do this, and a non-profit needs to follow strict rules.
Many people think that non-profits give all proceeds back to the community, and that non-profit founders don’t earn a salary. However, non-profits have operations expenses just like businesses, and these expenses are often funded by proceeds. There are several non-profit and social enterprise founders that have the ability to run their organizations as a side project, and they don't take out a salary. Others take a salary, and some non-profit founders even fundraise specifically for the salary so that individual donations go straight to the cause (like Charity: Water).
Sustainable change depends on you, not on your business model
Whether you run a non-profit or a social enterprise, it's your responsibility to make sure that you are making a sustainable and lasting impact. When I was in the Peace Corps, one of the first things we learned was to "Do No Harm" meaning that we are there to help, not to make things worse, so we needed to be very careful about the programs we created. As change-makers and development workers, we need to be culturally sensitive and make sure to talk with the community about their needs and what type of project would be beneficial to them. Often times foreigners come into a developing country and create programs without involving the local community. Even though we may have the best of intentions, without involving the community, we can add to the dependency of developing countries by staying on an aid model (of course, during humanitarian crises, aid is necessary, but long-term aid isn’t and it usually debilitates a country and causes much more harm than good). More on this topic for another day!
Consider funding sources
A big difference between non-profits and social enterprises are the funding sources. Do you sell a product or service, and is that product or service responsible for the majority of your revenue? If so, you would most likely want to create a social enterprise structure and incorporate or form an LLC. Examples of these could be ethical fashion companies, heart-centered coaching businesses, eco-friendly beauty brands, yoga teacher businesses, etc.
On the other hand, if you do sell a product or service, but it isn’t your main funding source, and you rely on donations and/or grant funding, then you would want to become a non-profit—and specifically a non-profit with 501©3 tax-exempt status. Being incorporated as a non-profit without 501(c)3 statues means that your organization has a social mission and although you can still receive donations, these donations will be counted towards income and you will need to pay income tax on them (and your donors will not receive a tax deduction for their generous donations). Some donors don’t mind and want to help and donate anyways, but several donors will only donate if they can receive the tax deduction.
If you work with artisans, are product sales your main source of funding?
If you are an organization that works to empower artisans, you may wonder how to know if you will be earning the majority of your revenue through product sales or through donations/grant funding. It has a lot to do with you, the founder, and what lights you up. Do you enjoy fashion design, photography, marketing, quality control, sales, and collaborating with bloggers? Or do you prefer to share your story through one-on-one meetings, at events, or through writing grant proposals? This is so important to explore! Many times founders think that they like something, when they really don’t, and that’s one of the main causes of burnout and ineffectiveness... it could even cause your organization to fail. So take some time to explore what you enjoy and what you’re most effective at, and keep doing more of that!
When you start you will probably be wearing most of the hats in your business until you start outsourcing, delegating, and hiring a team. So until then, take time to figure out what you're passionate about doing!
What are the advantages of attaining 501(c)3 Status?
501©3 non-profits have several advantages that other organizations do not. That being said, they do have to file more paperwork, and the initial set up can take more time. They also need to set up a Board of Directors and schedule meetings with them at least a few times each year. But if you can get passed those initial hurdles, the advantages are many, including:
- Not having to pay income tax, which allows even more money to support your cause
- Giving your donors an extra incentive by allowing them to get a tax write-off
- Receiving discounts on services such as PayPal, Quickbooks, Google AdWords, etc!
- Ability to work with corporate sponsors who only work with 501©3 organizations
- Having more credibility—the 501©3 application takes time, effort, and needs to be approved by the government. Because of this, the general public knows that a minimum, if not great, amount of credibility is required.
If you're a for-profit social enterprise, how can you demonstrate your social impact to your supporters?
So say you’re a social enterprise LLC. Is there any way to show your supporters that you’re credible and really do make a difference in the world?
Yes! There are a couple ways. If you are an ethical fashion company or produce a sustainable food product that works with artisans or farmers in the developing world, you could become fair trade certified. This means that you follow the 10 principles of fair trade and that you have gone through the lengthy process of becoming a member of the Fair Trade Organization and/or the Fair Trade Federation.
You could also become a certified B Corporation. B Corps are for-profit businesses that undergo auditing by the B Lab non-profit and have met rigorous standards of environmental and social ethics while also demonstrating accountability, high performance, and transparency.
Whether you choose to start a for-profit social enterprise, a non-profit, or a hybrid, in the end, it all comes down to YOU in terms of social impact. If you take the time to be intentional about the social impact of your organization, you will indeed make a difference in the world.
I hope that this post was informative and helped you navigate the process of becoming a non-profit or social enterprise! I'll share more on the topic in future posts!
I would love to hear from you! Was this post helpful? If it was, please share it with those who may benefit from reading it! Please comment below and let me know which part was the most helpful, and if you have any other questions!
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Peace and love,
Disclaimer: The content of this blog post is based on my personal experiences with non-profits and social enterprises and is not meant to be taken as legal advice.