Social Enterprises – Some Basics

The Social Enterprise Alliance (SEA), a 501(c)(3) membership organization devoted exclusively to building sustainable nonprofits through earned income strategies, defines social enterprise as:

an organization or venture that advances its social mission through entrepreneurial, earned income strategies.

San Francisco-based REDF, a 501(c)(3) organization formerly known as The Roberts Enterprise Development Fund, offers two reasons an organization might pursue a social enterprise:

1.  As a strategy to further its social mission, for example to create transitional and permanent job creation to benefit a targeted population.

2.  As a source of earned income as part of a strategy to diversify the revenue base.

A social enterprise may be formed by an organization as a subsidiary or otherwise affiliated organization.  It may be formed as either a nonprofit or for-profit organization.  And it may be formed as part of a joint venture with another entity, often as a partnership between a nonprofit and a for-profit.  It should be recognized, however, that a social enterprise is no panacea for a nonprofit facing financial difficulties.  This is complex territory requiring substantial research, planning, resources, patience and change.  Fortunately, there are a few great resources on the web to help organizations considering the use of social enterprises …

REDF – FAQs covering the following issues among others:

  • Isn’t it illegal for a nonprofit to run a for-profit business?
  • What are the reasons for creating nonprofit enterprise?
  • What are the reasons for not attempting to launch a nonprofit enterprise?
  • How do I go about starting a nonprofit enterprise?
  • How do we educate ourselves on these issues?
  • How do we determine what kind of business to start?
  • What will be the impact of this on our organization?  Should I anticipate board and staff changes?
  • How much will it cost?
  • How do I convince my board?
  • What are the most critical success factors?

Social Enterprise Alliance – Resources

IRS – Among the legal considerations is the issue of whether the social enterprise is generating unrelated business income subject to unrelated business income tax:

Definition of Unrelated Business Income

Publication 598, Tax on Unrelated Business Income of Exempt Organizations