Starting up an enterprise once seemed like a relatively cut-and-dry matter. If you wanted to make the world a better place, you could start a nonprofit; if you wanted to make money, you could start a for-profit company. But what if you’re interested in doing both?
On October 7th, Stephen Falla Riff from the Community Development Project at the Legal Aid Society gave a seminar at the Foundation Center’s library/learning center called The For-Profit/Not-for-Profit Dilemma: How to Choose the Best Legal Form for Your Social Enterprise. In this program, he gave our audience a detailed breakdown of the different types of legal forms, and the issues that should be considered when selecting from among those forms. Based on Stephen’s presentation, here is a brief sampling of some of the most common types of social enterprises.
Not-for-Profit Corporation: This is the most common and traditional route for anyone interested in pursuing a social mission. Your organization’s mission will be the foremost duty here, and as you are probably already aware, your purpose is not to generate a profit. This does not, however, mean that you cannot participate in any business activities. In addition to receiving contributions from individuals, foundations, or the government, you can (and often should!) financially support your nonprofit through earned income that is closely aligned with your mission. Examples would include a theater company charging money for tickets, or a private school charging tuition. You can also earn unrelated business taxable income, which is income for your organization that is not related to your mission, such as a museum that operates a coffee shop. You can use this income to help support your nonprofit, but as the name suggests, it will be taxed.
A nonprofit is also capable of controlling a for-profit business by holding the majority (or all) of its stock, so long as their finances are kept separate and the two groups do not become so tightly linked that they constitute a principal-agent relationship. So the gist is, it's okay to run a nonprofit and still have some money coming in to sustain the organization, so long as it is kept within reason and within the legal limits.
Business Corporation: Starting up a for-profit corporation obviously means that generating a profit should be a major priority for you, but that doesn’t mean it has to be the only priority. Rather than solely emphasizing the bottom line of profit, for-profit social enterprises consider themselves to have a "double bottom line," meaning that profit and the social mission are both top priorities. Some even have a "triple bottom line" that brings environmental sustainability into the fold as well: "people, planet, and profit." What can make a for-profit company a little more troublesome to build than a nonprofit is that you will be taxed just like any other for-profit, and you cannot receive grants the way a nonprofit can. Instead, you will have investors, and you can also seek program-related investments. A good example of for-profit social enterprises that have gained prominence lately would be microfinance institutions, which offer credit to people in poverty while simultaneously generating a profit.
Low-Profit Limited Liability Company (L3C): This is a hybrid of a nonprofit and for-profit corporation. An L3C is run almost the same as a regular for-profit company, except that its number-one purpose is to fulfill a social mission. Generating a profit is a priority, but it's a lesser priority. An L3C is not tax-exempt, and it may seek investors and program-related investments as funding. The IRS places some restrictions on an L3C: there are limits to how much profit you can reasonably make or property you can obtain; you cannot participate in any political work or lobbying; and it must be clear that fulfilling a charitable goal is the main purpose of the organization's existence. New York State does not have the L3C form just yet, as it's still a new concept. So far, the states that recognize L3Cs are Vermont, Michigan, Illinois, Wyoming, and Utah. North Carolina and Maine have just recently passed L3C legislation, and many other states are currently in the process of pushing for L3C recognition.
There are additional forms that a social enterprise can take on as well, and the information presented here is only a tiny sample. To learn more about all things nonprofit, for-profit, and in-between, visit the Social Enterprise Alliance, Social Returns, and the Roberts Enterprise Development Fund. Also have a look at the Foundation Center’s FAQ, What is Social Enterprise?, or search our Catalog of Nonprofit Literature using the subject/descriptors "social entrepreneurship", “venture philanthropy,” or "program-related investments".
-- Tracy Kaufman, Library Assistant, Foundation Center-New York