Here at Novel Hand, many of our posts center around different humanitarian issues and the specific challenges and voices for change within those issue areas. However, another large goal of this project is also to make humanitarian change more tangible by defining common terms that are used, and considerations that should be made, when engaging in altruism. For today’s post, I am considering the difference between nonprofit and social enterprise organizations.
When thinking of charities or organizations whose aims are to “do good” we often think of nonprofit organizations. However, social enterprises, which can operate as for-profit or through a hybrid of not-for-profit and for-profit financing structures, are a growing branch of organizations seeking to do good in their communities.
Non-profits
According to the Chamber of Commerce, nonprofit organizations are organizations that distribute any kind of profit or money raised directly back into the organization itself and that serve the public good in some way. These organizations qualify for tax-exempt status by the IRS. They also must make their information about finances and operations public so that individuals are able to see how their donation money is used.
The Council of Nonprofits further clarifies that there are a number of types of not for profit organizations that are tax-exempt under the United States tax code. These exemptions can be found in 26 U.S. Code § 501. For example, section 501(c)(4) exempts social welfare organizations, homeowners associations, and volunteer fire companies, section 501(c)(6) exempts chambers of commerce, and 501(k) exempts childcare organizations. However, when most people refer to “nonprofits” they tend to think of 501(c)(3) exempt organizations.
Under section 501(c)(3) of the tax code these are described as any corporation, “community chest, fund, or foundation, organized and operated exclusively for religious, charitable, scientific, testing for public safety, or educational purposes.” Thus, the nonprofit distinction comes from both the organization’s purpose and its taxation and financing structure. Social enterprises often share the same or a similar purpose to nonprofits, but do not always share the same financing and taxation structure.
What is a Social Enterprise?
The definition of a social enterprise can be hard to pin down as the concept continues to evolve. The Social Enterprise Alliance (SEA) recommends starting with the basic working definition of “organizations that address a basic unmet need or solve a social or environmental problem through a market-driven approach.”
According to SEA, social enterprises, which exist on a spectrum of nonprofit to for-profit, usually fit into three main models:
- Opportunity Employment “organizations that employ individuals who face significant barriers to mainstream employment”
- Transformative Products or Services “organizations that create social and environmental impact through innovative products and services”
- Donate Back “organizations that contribute a portion of their to nonprofits that address basic unmet needs”
Any non-profit can be a social enterprise in that they use innovation to address the needs of a community. The “social enterprise” distinction represents a larger sector than non-profit or for-profit, which nonprofit advisor Atul Tandon described to Forbes as merely a “tax label.”
While most people think of nonprofits when they think of altruistic organizations that operate for the common good, expanding our understanding to include social enterprises is an important step to envisioning greater possibilities for altruism. The field of social enterprises shows that the nonprofit financing structure may not always be what makes the most sense for an organization’s mission and the avenue to achieving it. Thus, this broader definition, which includes nonprofits, for-profits, or some hybrid of the two, is helpful.
For example, Jane Chen, in the Harvard Business Review, explains why it might make more sense to characterize one’s organization as for-profit rather than non-profit even if one’s goal is not monetary gain. Chen explains her invention of the Embrace Infant Warmer, a device that allows for the temperature regulation of at-risk newborns at a low cost and without constant electricity. Chen’s aim was to help provide this device to disadvantaged communities. She decided that the best way to achieve that goal was to establish a nonprofit organization with a for-profit arm.
The nonprofit arm, Embrace, owned the technology’s intellectual property, would use donations to provide the product to disadvantaged communities, and would create an ecosystem for promoting newborn health. The for-profit arm, Embrace Innovations, raised money through venture capitalists, and would handle clinical testing, manufacturing, and research and development. Chen and her team decided that this was the best route to take because it would allow the organization to source capital from private investors to set up a large enough sales and distribution infrastructure to give as many babies a chance at a healthy life as possible.
Chen’s article and experience illustrate that just because a social enterprise may operate for-profit does not mean the organization is more self-serving than a nonprofit. Individuals may be more willing to invest than to donate, making for-profit operations more viable, or an organization may seek to run a profiting business that also aims to bring a positive impact to the community. Either way, in order to be considered a social enterprise, this aim to aid the common good must be at the center. Social enterprises allow for a broader understanding of organizations that “do good” that extends beyond nonprofit financing structures.
In the same way that nonprofits can be poorly run, so can social enterprises. We recommend doing your homework before supporting one of these organizations regardless. We all operate in a consumer world where we choose how we use our money, which may be in the form of a donation or in choosing to buy a coffee from a company that hires traditionally disadvantaged individuals instead of the local Starbucks. Either way, we encourage our readers to be thoughtful about how they seek to engage in social change. Expanding our definition of organizations that “do good” from nonprofits to social enterprises is one way to do so.
If you want to learn more about social enterprise, listen to Grace’s conversation with Alexis Cook, co-founder of Unlocked, a social enterprise that creates opportunities for women experiencing homelessness. You can also read about Unlocked here.
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