By Roger Robinson, Ph.D., Certified SCORE Mentor
Nonprofits are traditionally defined as legal entities that conduct business for the benefit of the general public. They are without shareholders and without a profit motive. They cannot distribute corporate income to shareholders. The funds acquired must stay within the entity accounts to pay for reasonable salaries, expenses, and the activities of the corporation. An excessive salary may cause the entity to lose its nonprofit status.
Nonprofit corporations are exempt from the income taxes that affect other corporations only if they conduct business exclusively for the benefit of the general public, i.e. are mission driven. They may charge money for their services. Contributions to tax-exempt nonprofit organizations are tax deductible, subject to Internal Revenue Service approval.
Today, given the difficulty nonprofits have in finding funds, a new approach is evolving that resolves or at least minimizes the dependency of nonprofits on donations. These new entities are caller social entrepreneurship. They are defined as mission-driven organizations that use entrepreneurial behaviors to deliver a social value. They cater to the underserved through an entrepreneurially oriented entity that is financially independent, self-sufficient, and sustainable. They are led by social entrepreneurs, ambitious, persistent individuals with innovative solutions to society’s most pressing social problems. They are tackling major social issues and offering new ideas for wide-scale change.
Note, this definition of social entrepreneurship does not extend to philanthropists, activists, companies with foundations, or organizations that are simply socially responsible. While these agents are needed and valued, they are not, by definition, social entrepreneurs.
Some social entrepreneurs overcome the challenge of funding by having an earned income strategy. They operate a social enterprise performing hybrid social and commercial entrepreneurial activities to achieve self-sufficiency. They still seek donations but also operate as a for-profit entity. For example, the entity may operate as a restaurant profitably during the day and then utilize its facility and staff during the evening to create meals for the homebound, thus fulfilling its mission. The income developed during the day supports the evening activity hence it meets the IRS definition of a nonprofit. Revenues and profits generated are used only to further improve the delivery of social values.
Caveat, however, a danger. If the IRS treats the income generated as unrelated business income, it is taxable. That being said, this issue can easily be resolved by careful, appropriate accounting procedures.