As social entrepreneurs view the landscape of potential funding available to them they inevitably begin to assess their options and opportunities for both non-profit and for profit investment. Both models have advantages and disadvantages and both can have a critical impact on how an enterprise is viewed in the marketplace.
The final decision for many social entrepreneurs is complicated by the fact that there is no clear answer; on the one hand a part of their activities often sit squarely in the public domain, while on the other, their commercial activities (by definition) would best be served by a more commercial format.
This is tricky territory for many social entrepreneurs and one we have faced both with clients in our consulting practice at Origo but one we also face ourselves in our work as a think tank that engages in research and development of social enterprise best practices.
Why Not Both?
One answer that we, and many of the people that we worked with, have arrived at is to structure as a hybrid social enterprise so that you can be both.
A number of social entrepreneurs have successfully built ‘hybrid’ organizational structures using a number of innovative approaches to tap into the strengths of both; non profits with wholly owned business subsidiaries, donated equity models and emerging for benefit business structures are all good examples of this type of thinking. Others have developed hybridized investment structures that achieve similar goals from the investor side like Calvert Foundation’s GiftShare program. In addition, there has also been research done by groups like the Aspen Institute into the frameworks that surround these structures and how to begin moving public policy to embrace the for benefit business structure initially pioneered in the UK.
Despite these examples, the decision to go ‘hybrid’ is still largely undocumented and feels difficult. We have invited some thought leaders in the area to comment on the subject and in addition we’d like to open out the discussion to others who have tried, failed or succeeded in building hybrid social enterprises. Particularly, we would be interested to hear people’s thoughts and experiences on:
- The advantages of a hybrid structure; what kind of opportunities were opened to your organization by going down this route?
- The risks; it seems like many people are put off hybrid structures by legal fears and complexities around governance, IP and conflicts of interest between one entity and the other. How have these risks been navigated and in your experience how real are they?
- The costs; how easy was it to set up the hybrid structure? What kind of ongoing management (bureaucracy) and accounting costs are associated with it?
- Any unexpected consequences or opportunities?
I haven’t been around in a while because the for-profit part of my structure is making me work a little too much right now :). But, thought I’d give some of my experiences with this structure.
My company, SparkPeople, has a for-profit business that focuses on online nutrition and fitness programs for consumers, online corporate wellness, and online pregnancy fitness and nutrition.
We also have a 501(c)3 non-profit named SparkPeople Service that does in-person programs for low income students in the areas of fitness, nutrition, and leadership – with a main focus on fighting childhood obesity.
Here are some quick thoughts on having a for-profit and a non-profit under the same roof:
– Overall, this has been an extremely positive experience. We do a lot of R&D on the for-profit side and then license some of that to our non-profit for free, giving it “bonus” resources.
– There were some legal hassles getting setup, but that wasn’t too bad.
– One problem for us in the beginning was making sure that the resources for each entity stayed separate. We would have employees on the for-profit use some non-profit resources which could cause very serious issues with the IRS, so we quickly developed smart systems for that so it doesn’t happen.
– I would recommend that non-profits considering making a leap to a for-profit really research and know what they are getting into first – and maybe have someone on their team familiar with for-profit startups. Most types of for-profit startups end up being harder than you originally think. My wife has a non-profit in Guatemala and she then started an internet cafe to help raise money for the village. This is a great project, but ended up being a lot more than she bargained for. (luckily she found a great partner with who could run that part)
– I think combining both types of organizations can lead to a great team spirit.
– We made sure the missions of the two organizations are different enough that it would be difficult to have much overlap or conflict of interest.
Good luck to everyone trying this!
SparkPeople.com BabyFit.com SparkPeopleService.org
Here are answers to the questions you pose in the order they were posed:
1. The advantages of a hybrid structure; what kind of opportunities were opened to your organization by going down this route?
Manyone’s governance model, its embrace of the Earth Charter as its value/vision statement, its forbearance in not allowing advertising on its portal platform and its unique funding mechanism have opened up a host of opportunties to partner with world-class NGO’s who have joined our Earth Coalition as stewards for accurate, up-to-date content which will debut in July as the Earth Portal ( governed by these stewards) brings their content to the Web in a very powerful way
Establishing alliances with these world-class contend stewards would not have been possible with a traditonalfor-profit portal service offering. Since we also share revenues from our for-profit service with our non-profit stewards it was a no-brainer for them to join with us in creating this new medium for the web.
The visionary technology was important in gaining steward participation, but the hybrid model was key in cementing their involvement.
2. The risks; it seems like many people are put off hybrid structures by legal fears and complexities around governance, IP and conflicts of interest between one entity and the other. How have these risks been navigated and in your experience how real are they?
Every IP issue and concerns over governance were settled at the beginning by the joint establishment of the for-profit enterprise run by successful business leaders with significant experience in leading high tech for-profit startups and the concurrent establishment of an internationally renowned set of Directors for the non-profit ManyOne Fooundation (a Canadian non-profit) We have since added a 501(c)3 US nonprofit called the Digital Universe Fund to enable us to encourage venture philanthropists to support our ongoing very long term strategic goals of funding content development as a continuing added value to the initial Earth Portal, Cosmos Portal and Health Portal platforms. After a lot of arduous legal work and a lot of attention to the governance structure and civial society focus of our model, we think we have created a hybrid model that really works.
3. The costs; how easy was it to set up the hybrid structure? What kind of ongoing management (bureaucracy) and accounting costs are associated with it?
It was expensive relative to the costs of setting up a non-profit or a for profit entity as opposed to the hybrid model and it wasn’t easy to iron out all the kinks in the dual relationship – lots of dialog amongst the founders, investors and employees has resulted in a coherent model we believe will stand the test of time.
4. Any unexpected consequences or opportunities?
The need for a US 501(c)3 was a late issue, and we initially met this obstacle to accepting charitable contributions with US tax benefits to our donors through the establishment of the Digital Universe Fund in affliation with the Community Foundation of Silicon Valley which allowed us to use the relationship as a conduit for donors funds while we were still getting the 501(c)3 status approved. So we are grateful to have had the support and guidance of CFSV in getting over this obstacle in attracting charitable contributions to fund several early and important content development projects we could not have funded in any other way. The relationship with Peter Hero’s outstanding team at CFSV got us kick-started on this process and it made a big difference in our credibility to receive significant donor contributions at a time when we really needed them.
In summary, we are just about to “go public” with our for-profit portal service after 3 years of development and the testing of various ways to encourage investors and venture philanthropists to join us. If the discussion group would like further information on the structure of our hybrid I will be happy to inquire with the ManyOne founders to see if they are willing to share more of our experience.
I think the hybrid concept is a very powerful alterntive to the separate of for-profit and non-profit entities that seems always to mix people up and confuse the issues of financial sustainability and mission-driven service to civil society. I am confident that the ManyONe hybrid will deliver on both sides of the financioal and social benefit equation – and our commitment to Open Source technology for most of our platform infrastructure adds just one more compelling component to the mix.
Sorry for the length of the response – but you DID ask the questions?
Dave Davison Advisor ManyOne Networks
When we started Empowerment Gateway’s we realised that our aversion of overdependecy on grants our donations required some strategic planning ….
thus we created our operational model incorporating both profit and non-profit within the same structure.
to read more about it visit our website on www.empowerment-gateway.com
and so far it appears to be working.
Following up on my previous post:
Jeff, when u stated that there wasn’t much information about hybrid models made me think back to our starting days of research +- 5 years ago. Being a group of engineers that had spent most of our life within the mechanical reengineering field led to us debating the merits of reengineering the economic models so as to obtain the wanted outcomes. And our group followed the principles of “Empowerment through socio-economic reengineering and innovation”
Re your Q1 – Advantages
- Reduction of over dependence on grants and donations
- We practice what we preach (use of CSR/CSI optimization in a profit driven business structure)(We always wondered how can you be involved in business incubation if you yourself is dependent on grants … etc … how can you train and motivate potential SME’s? …
- Opportunity to do and live our beliefs whilst keeping food on all our tables
Re your Q2 – Risks
- Lack of info in the market, led to longer start-up phases and income generation
- Governance was not an issue for us … after all we grew up in a business environment governed by governance (ISO, Laws, etc …) … it was easy for us to incorporate them into the structure (we used CSR/CSI principles and used ISO frameworks to create our own model … currently we will be aligning to ISO 26000 <still in its development phase> combined with all normal South African legislation directives.
- Regarding potential conflict of interest – once again by following a “full disclosure” route it reduces the risk of potential conflict of interest…
Re your Q3 – Costs
- Yep the costs are higher … something that in future will need to be addressed … but there are various models and opportunities around to reduce it
- Management and bureaucracy are part of life … but our solution was to identify individuals that followed the same ethos and principles but who also brought to the table the necessary skills and competencies and were willing to be part of a team
Re your Q4 – Consequences / opportunities
- People and businesses acceptance of our model took us by surprise …
Hope this gave you a quick overview
Many thanks for kicking off this conversation to such a lively start. I hate to do this to you after all the work you put in writing the answers to my questions but I feel like we were getting tantalizingly close to information around structures and process that could be really helpful to people considering these options….
Chris – a couple of points – firstly I was interested around the need for separation of resources between the two organizations – an excellent practical piece of advice; in terms of smart systems I’d love to hear more of your solutions on that…
Secondly, on the mission differentiation – speaking to Dave D’s post – the whole drive for many organizations is to align the missions of both organizations and to pull resources down from the most suitable partners; I’d be keen to know if you have been able to get business advantage as well as non profit advantage from housing the two structures together..
Dave – many thanks for the full response – I was intrigued by the partnership opportunities you referred to in your piece and would love to hear more about that. Also – please do see if we could see some of the structure details you mentioned – I think the more granular and operational this discussion can become the better…
Lastly Laurinda – you mentioned a reduction of grant dependency as an opportunity – how’s that going? I think I understood what you meant by full disclosure being the way forward but would be keen to understand what that means in practical terms to your day to day work. You also suggest that there would be ways to reduce costs associated with hybrid set up – can you point us to any of the models you refer to?
Thanks again all
Sure! Our systems are fairly simple and direct:
1) Physical separation – we made sure that all of the non-profit resources were located in a separate area in our building and clearly marked as non-profit resources.
2) Consequences – we helped everyone in the organization on both sides understand the serious consequences for any mingling of resources (especially non-profit use by for-profit) – and honestly understand that there would be personal consequences to them if they broke such a clear rule that could materially hurt the company.
Center for Civic Networking
I started a tiny non-profit (The Center for Civic Networking) in 1992 – to do a mix of grant-funded demonstration projects and policy work.
We kept getting dragged into areas that really had nothing to do with our main mission (seminars, consulting, web development) – and several of us ended up pursuing that work as independent consultants (sort of like academics with sideline businesses).
There was never any official coupling but effectively we were a hybrid.
Re. the specific questions:
Advantages/Opportunities: Primarily having real income streams for several of us. The non-profit allowed us to pursue funding sources that didn’t send money to for-profits. The non-profit also afforded us some credibility (much the same as academic appointments do).
Risks: Not a lot. It took some effort to make sure we didn’t use non-profit resources on private projects, and that we didn’t do things privately that would have been legitimate for the non-profit to pursue. In general, though, money tended to flow from the for-profit activities to the non-profit (e.g., I ended up with a small hosting business, and donated computer time to the non-profit) – it’s rarely a violation of anything if money flows TO the non-profit.
Unexpected consequences or opportunities: None.
One additional comment: It strikes me that cooperative corporations are an interesting alternative structure that mixes some of the characteristics and benefits of both the non-profit and for-profit environment.
I must say that I have found all your comments interesting.
Jeff – regarding your request for more detailed info around structures and processes.
Am not quite sure what specifics you are looking for, may I suggest that you list them in point form, then maybe we can give you more structured answers?
Regarding your other comments here’s a synopsis of my own experience:
- Sharing of Resources – Risks
We took cognizance of that fact early on.
In our model, each operation functions as an independent entity with its own structures. When we need a cross pollination of skills or other resources, this is managed via our centralized resource channel (again an independent business identity). We find that it works very well for us. Major benefits are:
- bulk buying, etc
- pool of human resources
- pool of other commodities
- Grant dependency – (or lack thereof -:) )
Our business model and structure generates its own funding. What we are experiencing at the moment is that we are not applying for funds, but that Funders are approaching our NPO to manage and implement either their CSR projects or we are being allocated the management of their CSI budgets.
- Impact of disclosure on day-to-day – versus conflict of interest
We find that the guidelines and systems that we have implemented coupled with our recruitment process has identified a practice that is dealing effectively with it. Through this process, potential conflict situations are greatly reduced. We are lucky in that we don’t have to go through a paradigm shift in our organisation … It is easier to apply systems and processes in our situation than it would have been, had we had to go through a transitional phase.
- Finally regarding the business model.
Difficult to answer, because all we have done was to reengineer existing models as the backbone, and to create new ones when we couldn’t identify existing models suitable for our own purposes and to then create interfaces between the lot.
We believe that the model we have created is unique. The question is why did we follow the route that we did?
We wanted to show the “world” (as in a South African context) that you can merge both a profit and“not-for-profit” philosophies. We realised that a bridge was required, so we created the bridge as our model.
This was based on the question that we asked ourselves: Being what do we WANT? Do we want money? Do we want to apply our social consciousness? … or did we want it all? Once that had been answered the rest was the easy part.
Our vision: we want to generate sufficient funds for all of us to live a reasonably comfortable life, whilst at the same time create a platform to generate the funds required to sustain our social initiatives without having to depend on third parties.
5. Regarding the Cost factor we have become experts at bartering! (by following the principle embed in the “new” economic principles) … and we found that it works. It did for us anyway!
Hope I was able to answer you.
We have a wholly owned for-profit subsidiary, under a 501(c)(3) parent. This was handy to shift a bunch of UBI income out of our (c)(3) and into a for-profit. The taxes are the same either way, but the nonprofit doesn’t risk its status by having too much UBI (we had more than a million dollars of consulting income the first year of the for-profit sub).
Forgive me for asking … why did you end-up with a cash surplus? … and what is the purpose of your not-for-profit organisation? … and what portion of the “group” profits do you apply within the not-for-profit structure?
I wouldn’t say that our issue was one of a cash surplus: the gross amount was the problem rather than the net amount. Our purpose is to develop technology for social applications, in this case in the disability tech field. Lots more background at www.benetech.org.
Since our sub is wholly owned, all of our profits are destined for use in the nonprofit (after taxes).
We’ve always had the sense that the hybrid structure really was a good way forward and this discussion goes some way to confirm that the hybrid model can be a good practical way to run a social enterprise.
Marty – I’d be interested to understand more about your insights as to how the cooperative corporation structure fits into the dicussion.
Laurinda – many thanks for your detailed input; around your initial question on structures and process – I was specifically thinking of someone reading this who was thinking – OK, so what’s the next step? Do I need to start a new entity, do I need a lawyer or are there models out there I can begin to learn from?
I think you begin to suggest at an answer around bartering (a call to arms if ever I heard one) and that is in fact the way we went about this ourselves – asking for help, advice and input from our local community of contacts.
An interesting aside; in our experience, many who would be unwilling to help a for profit social purpose business as volunteers or by providing pro bono services will react very differently if they feel they are donating time to either the establishment of or providing ongoing support to a non profit.
Jim – hello! I first heard of the hybrid model from Benetech over five years ago so I’m very glad you were able to jump in and lend your experience and insight to this conversation. It’s particularly interesting to note the fuidity and flexibility of approach that this structure has allowed Benetech as an NGO with a wholly owned subsidiary.
Keep it coming!
Lastly; would anyone happen to have a lawyer ‘friend’ that you’ve worked with on these ideas that you could ask to jump online? I know in large part this may be very country specific but would be a good way to begin staking out the legal issues at hand.
Center for Civic Networking
Jeff – I think you meant to say “Miles – I’d be interested in … cooperatives” – at least, I’m the one who raised it.
It strikes me that for-profits and non-profits each have their advantages and disadvantages – and that coops can blend the two.
Non-Profits: – tend to be more mission focused – can go after grant funding and volunteers a lot easier than for-profits – a better “image” when pursuing social goals but, – more restrictions on how you can organize and what you can do, if you want to keep your 501(c)3 status – much harder to pay good salaries and reward people (no stock options and so forth) – which somewhat limits who you can hire (though hospitals seem to do ok in this regard)
For-Profits: – a lot more flexibility all around in terms of organization, what you can and can’t do, hiring, paying people, etc. – possibility of attracing investment capital – possibility of going after some kinds of government contracts but, – image issues (even if you’re doing the right thing, you can be attacked for having ulterior motives) – easier to be dragged off-mission by market forces, large investors – depending on how organized, susceptible to takeover
Cooperatives can provide a mix of both: – can be either non-profit or for-profit – can have a mix of both for-profit and non-profit (and government) members – charter and member ownership keep the organization on mission (organized for the benefit of the members) – if organized for profit, can have a lot of the same organizational and financial flexibility of for-profits – particularly if you have an economic development mission, the specific purpose of most coops is to either generate income for, or reduce costs for members – positive image opportunities (all the ads about buy your orange juice from us – we’re owned by the farmers who grow the oranges)
I guess there are similar possibilities with employee-owned corporations.
I take your point, again it would depend on the type of venture and the wanted outcomes.
I can only speak from a South African and African perspective because that is the arena that we have researched extesively, and I guess this could be applied in any developing country.
Within a SA context, over and above the normal directives we also have something called Black Economic Empowerment which saw a minority of black individuals benefiting from goverment legislation while the majority is still in limbo … then the goverment as a result of all the objections raised in various quarters introduced a Broad Base BEE code of practice in an endeavour to rectify injustices of the past which had affected PDI’s (previously disadvanteg individuals) …
… will carry on later.
ciau for now
Greetings all! This is my first post on social edge.
I am an attorney who has been representing nonprofits for about 20 years, and the past five or six have been pretty involved with social enterprises. I see these issues come up both with nonprofits that are engaging in business activities, and with for-profit companies that want to provide funding to charities or run their business in such a way as to serve a social purpose and make a profit.
The “hybrids” I work with are typically nonprofits that create one or more subsidiaries to handle their business activities. They do this because they get better tax treatment of business expenses using a for-profit model, and often the compensation arrangements are different and may need to be more flexible. Sometimes they just want to avoid UBIT or protect the charity from potential liability. Since they can pull revenue from the businesses in the form of license fees, rents, expense reimbursement and dividends, UBIT is rarely an issue when a subsidiary is used. Another advantage is that philanthropists (as opposed to investors) can make a grant to the nonprofit parent who then contributes it to the business in the form of a loan or capital contribution.The commerciality doctrine problem also goes away whenm you use a subsidiary, although I think that’s less of a problem than it used to be.
Lately I’ve been working more with for-profit, social purpose businesses, and the issues there are more interesting. I think one big issue that is not really discussed is the fact that traditional “for-profit” law assumes that the company exists to maximize return to the shareholders, and charitable contributions can only be justified legally to the extent they constitute a marketing expense or an way to promote the business’ interests. So in seeking investment (typically in a private placement under Reg D), it becomes very important to disclose the social purpose and how it will affect the way the company runs and the return to the investor, not only to avoid securities fraud, but also to make sure that your investors’ expectations are in line with the company’s goals and values.
Moving pre-tax money from a for-profit company into charity is also a challenge, since the charitable deduction for corporations is limited to 10%, not 50% as it is for individuals. There are several ways to do that, such as creating a charitable foundation that owns a special class of shares, but I think most companies just take the tax hit and use after-tax profits to fund their charitable interests.
There are a few really interesting social purpose businesses that I have seen recently. Wisdom Says, which markets “cause-metics” under the Peacekeeper name, is one. Belu Water and Transform are others.
The idea of a “B” corp; a true hybrid of for-profit and nonprofit is very problematic as a legal matter. You are really trying to merge two very different types of entities, each of which has a rich and detailed body of law behind it, and two completely different regulatory systems, each of which has its own bureacracy and traditions behind it, and it is kind of like trying to mix oil and water: they are both liquids, but their fundamental composition is incompatible. I think there are ways to do it, but it will require more than creative thinking (although that is not trivial;) a constituency for this beast has to be created as well.
Just my 2 cents. I find this whole discussion fascinating!
Allen Bromberger, Esq. New York City
Perlman & Perlman, LLP
This is exactly the type of dialogue which will need to take place in a broader context to effect legal change, because the law is unfortunately lagging behind the innovative thinking that is taking place in forums such as this. But until new legislation is forthcoming, there remains no single entity existing under United States federal or state law designed both to maximize profits and to achieve a socially responsible mission. The traditional for-profit coporation is a vehicle used to maximize profits for shareholders, not for giving profits away, and receives “double taxation”: both its income, and the dividends it pays, are taxed. Managing a charity requires a different skill set than managing an enterprise. Therefore, it can be useful for today’s social enterprises to have a for profit subsidiary as part of their structure in order to attract capital. The limited liability company, while preferrable to the corporation from a tax perspective and very flexible from a governance standpoint, is a relatively new vehicle and, because it is untested, is out of favor with some investors. In addition, LLC’s are not generally a proper vehicle to use if your enterprise is planning to go public. Nonprofit corporations recognized by the IRS as income tax exempt under Internal Revenue Code section 501(c)(3) cannot be owned and the prohibition against private inurement and private benefit restricts the distribution of dividends and wealth to investors. Housing the enterprise in a for profit subsidiary serves the purposes of a nonprofit by avoiding distraction to mission that could come from nonprofit managers trying to run an enterprise. Having affiliated nonprofit and for profit entities enables the for profit entity focus on maximizing profits while the nonprofit can focus on maximizing social benefit. The nonprofit form, of course, is essential when seeking to accept charitable contributions from individuals and venture philanthropists who are seeking no return other than an income tax deduction. A 501(c)(3) is also the most likely vehicle to receive foundation grants because foundations who make grants to entities which are not 501(c)(3)’s are required by tax law to exercise expenditure responsibility, which is administratively unacceptable to most foundations.
Foir the most pure of social enterprises, which seek to maximize profits only so that they can give all of those profits to charitable causes, the hybrid model is imperfect because it is difficult to move profits out of the for profit corporations without conflicting with the interests of investors (who normally seek to generate personal wealth) and employees (who may disagree with a strategy that results in an outflow of the company’s capital without raising salaries).
Three such enterprises which come to mind are PeaceKeeper (Cosmetics), Belu (Bottled Water), and TransForms (Decorative Art Product). Each of these innovative companies operates in most ways like traditional profit maximizing entities with ambitious business plans, creative and sophisticated marketing techniques and tested management teams. Yet as these enterprises move forward to raise capital the capital they need to generate profits for charity, investors will need to look at them as offering more than a financial return, because of the social return that comes from the commitment by each of these companies to donate 100% of their profits to charitable causes. The question is, what legal form is best for these “for benefit” companies? What I’m hearing is that there is a growing demand for a new form of entity that recognizes the social benefit these corporations provide while at the same time provides the framework to attract capital and maximize profits. Based on my experience, these companies look more like 501(c)(3)’s than business corporations because it is the social benefit and not personal gain which is driving their founders. And of course it is the public, and to a certain extent government, which stand in the best position to benefit from their activities. If there were a legal form recognized under tax code section 501 that was perhaps partially income tax exempt, could receive tax deductible contributions, but which was also permitted to generate income and reward shareholders for risking their capital in order to enable these companies to grow and flourish, these “for benefit” companies could spend less time concerning themselves about legal structures and more time to making a difference in their communiities and society at large. Of course, the IRS is not quick to forego tax revenue. Therefore, until there is a broad based grass roots movement strategically aligned with powerful lobbying forces, we will be forced to shoe horn todays evolving businesses into yesterday’s legal structures.
Hi everyone. Thanks for an interesting conversation on what I think is an area ripe for both research and action.
I’m posting to let y’all know about a recent meeting the Nonprofit Sector and Philanthropy Program at The Aspen Institute held that addressed this new space of hybrid activity and organizational forms. Designed to bring together a diverse group of business, nonprofit, academic, policy, and foundation leaders who are actively working on this issue — but not necessarily working together — the meeting featured research we commissioned from the Democracy Collaborative at the University of Maryland. Entitled Building Wealth: The New Asset-Based Approach to Solving Social and Economic Problems, this work describes the development of a range of strategies — from programs that help low-income individuals develop savings, to community-based strategies that build neighborhood and workplace assets, to municipal and state asset accumulation initiatives in which government acts entrepreneurially to create jobs and spur locally-based capital formation — that are a potentially powerful economic force for helping to solve social problems. You can find information about this research and report on http://www.community-wealth.org/.
Representatives from these strategies (co-ops, employee-owned companies, CDCs, etc.) were joined by business folks (and a couple of lawyers) who are pursuing the development of a new For-Benefit corporate model that, in addition to combining a social purpose with business methods, integrates “extended” characteristics such as inclusive governance and ownership, accountability and transparency, and an open, stakeholder-driven organizational structure.
Our goals for this meeting were to not only present these asset-based and for-benefit paradigms (apologies for using that term), but also to facilitate cross-silo conversations among participants working in different fields but ultimately for the same ends. We are in the process of determining what we want to do next to advance work on this issue (ANY THOUGHTS?). A summary of meeting highlights will be available this summer. Check our website http://www.nonprofitresearch.org/ or let me know if you’d like a copy.
Sorry for the long post. Keep on talking!
We can’t answer all the questions you posed as we are a very newly separated hybrid – but our story may be of interest.
CawdNet’s various community development initiatives started in response to grassroots situations, ideas and needs. We have never had the money to do what we’ve done – it’s always been more a matter of knowing where we are trying to go – having a clear distant objective – and then just plodding on in the general direction – resources or no resources – putting on a bit of a spurt if help was around (maybe doing a bit of a detour – but always in the right general direction) and looking back now and again to be encouraged by how far we’ve come.
Under the influence of ideas picked up through Social Edge and the first Skoll Forum we started to think of what we were doing in terms of social entrepreneurship and hybrid organisations. Having learnt about the confusion hybrids can cause to “outsiders” we started to mentally separate out the different elements of what we were doing, including a separation between charitable and money earning.
We began to classify ideas, plans and projects as “CawdSocial” or “CawdEnterprise” – and found outsiders liked the simplicity of that. We began to think of some of our personal behaviour towards our projects as “investing in” projects instead of just “doing them” or “giving to them”. We began to think in terms of potential sustainable and profitable projects that could “include us in” when they finally become sustainable and profitable.
We realised that if we are shareholders investing, rather than volunteers dipping into our own pockets, then we can take money back out when there is some. Given that our voluntary work with the development projects was squeezing out our day jobs – we decided to look more seriously at an approach where projects can pay us dividends once we make them profitable.
It’s a kind of reversal of the normal approach. Most people make money though their business first then they set up a charitable foundation. We set up the charitable side first – and now we’re setting up a related business – Dada McLean Ltd. We know that we have a rich pool of knowledge, skills, ideas and networks through our years of practical, rural area, problem solving. We have established VSAT communication links right into the rural areas, pulled by local interest and with an appropriate skills and training base.
We believe that we can add value to what others are doing, or trying to do, in rural Africa by making our resources available to them. Instead of just writing proposals and going to donors looking for money for projects we want to do we are also offering the opposite approach. What ever it is that donors, investors, inventors, commercial companies, ecologists, politicians, who-ever – wants to try out in rural Nigeria – Dada McLean Ltd (Knowledge Brokers) will help them to do it better.
I recently came across an interesting legal structure allowing a for-benefit company (100% profits to charity) to ensure legally that its profits went to charity. This mechanism split shares into two types: shares that represented economic rights and shares that represented voting rights. This mechanism allowed the for-benefit to ensure its profits would be allocated to charitable entities (which owned economic rights) without sacrificing control of operations (voting rights). It has another potential application, however, which I think is equally interesting.
By splitting shares, founders can allow a company to delineate an exact percentage of ownership that goes to charitable purposes, and the exact percentage that does not. Knowing the troubles for-benefits can have in raising capital, I naturally wonder, “Why not delineate 75% of economic shares for charitable purposes and sell the other 25% to raise investment?” Because the founders would not own economic shares, the messaging could remain pure, ie: “Founders contribute 100% to charity.”
It would be a massive boon to prove that a social commitment can enable a company to compete better, either by appealing directly to consumers or by enabling it to generate critical support from celebrities/socially minded business people/others who might be strategic. Proving the viability of the for-benefit class would be a great boon, so I wonder why not use creative investment structures?
Why not 75%?
I’m sure there must be some good answers out there.
Even if this discussion goes away from the from the front social edge page do keep posting. Given the depth of information we are getting and the obvious interest we will probably come up with a synopsis of key ideas and post around to all those who might be interested.
In terms of the recent postings – many thanks for the additional thoughts – I’ll pick through the mails and respond either in forum or directly to you.
Thanks again for pushing this along and making it a valuable conversation!
transForms, FB / Fourth Sector Network
There’s so much wonderful thinking going on in this arena. I am grateful that Jeff and the folks at Skoll have created a platform for this dialogue. It seems that something significant is beginning to take shape.
To me, the hybrid approaches we’re discussing are rooted fundamentally in the fact that private gain and public benefit are not mutually exclusive domains. They are inextricably coupled in each of us and in all of nature. But the bifurcated for-profit/non-profit environment forces entrepreneurs to adopt legal, capitalization and governance structures that are sometimes antithetical to carrying out their missions. In response, more and more entrepreneurs are opting for hybrid approaches. This often has important implications for practically every aspect of their enterprise—including legal structure, capitalization and investment, accountability, governance, compensation, profit distribution, stakeholder responsibilities, and more.
In the aggregate, this hybrid activity is part of an emerging sector of organizations at the intersection of the public, private, and non-profit sectors—a new, not yet formally recognized class of organizations who’s DNA combines the best of the for-profit, non-profit, and other models (see attached diagram). As a For-Benefit practitioner (www.transforms.net), I’m really encouraged by the growing attention and support these organizations are attracting, and I’m really jazzed by the expanding community of entrepreneurs that I keep encountering.
This is clearly an idea whose time has come. To paraphrase Einstein, you can’t solve a problem at the same level of thinking that created it. If social entrepreneurship is to deliver on its promise at a significant scale, it is essential that we move beyond strategies and practices to considering the underlying organizational structures of social enterprises.
In addition to the great comments from the lawyers in our midst, it would be great to hear from entrepreneurs, philanthropists, investors, financial advisors, marketing experts and other specialists who have had experience with these types of organizations. I hope this is the beginning of a much longer discussion…
All the best, Heerad
Fourth Sector.jpg (357 KB)
This discussion is really getting interesting. (back to my previous mail)
So if one takes into account that we had more than just the normal legal directives governing a for profit and non-profit, by having the additional BEE legaslitation through in as well, we decided to create the group as follows:
1. A not-for profit that acts independently and owns another 2 not for profits companies and a foundation. This entity is governed by the not-for-profit legislation. It has its own constitution, it is a section 21 company (South African Law)
2. This organisation owns as well a share block of 50% (the control share in a for-profit business structure which follows the normal South African company law and business directives. (there are currently moves to allow for tax rebates for this type of control within the SA tax law) The not for profit appoints the board of directors and sets the guidelines for the governance of this business structure.
3. Then we set back and realised that we needed an independent corporate and social governance body monitor (auditing) as an internal group structure. So we created another business EIMA which is the group watchdog and reports directly to the board of trustees of the not-for-profit .
It sounds complex, but in fact it is fairly simple.
Each company within the structure just follows the guidelines that are applicable for each entity, coupled with good governance principles.
Hope this assists you.
Your Fourth Sector Graph fits in very well with our business structure philosophy, after all it follows the “Third Way” economic principles which embbedes ESOP’s, etc … in fact the “New Economy Philosophy”
In Empowerment Gateway we have done what you suggested but with a 50% share block available to external investors, profits distributed through normal dividends after tax going to the not-for-profit.
What we have also done was to alloacted a 20% of turnover to CSI spent which is administered via the not for profit.
We founded EnviroFit in October 2003 as a non-profit after extended discussions between the founders and our advisors about which form to use. Our idea is to develop and sell retrofit kits for 2 stroke motorcycles used as taxis in Southeast Asia (one of the largest sources of pollution in Asian cities; each motorcycle produces pollution equivalent to 50 cars). The taxi drivers are quite poor, and so we are partnering to offer microfinancing for them. We are currently doing a beta test in Manila. We are building a supply chain of parts from US, European and Asian companies. To the extent there is profit to be made, we believe it should be made by the local installation facilities in the developing world. For EnviroFit, the margins are quite thin, although in several years they become enough to support our operations. But our financial forecasts would not be attractive to investors, compared to the many excellent start up opportunities that are out there.
Frankly, we decided that a hybrid purpose was better accomplished with a non-profit structure. Bottom line, we wish to be measured by the number of tons of emissions we eliminate, not by our profit margin. This keeps us focused on what we believe is most important. So far, we have been able to attract start up capital(over $500,000) and an excellent team based on that approach. But it still is very much an experiment!
I am an entrepreneur and teach entrepreneurship at Colorado State University (and I am a recovering attorney). I have raised a fair amount of money in the private sector. The non-profit sector was new to me, but fortunately others on our team have had some experience with funding from governments and foundations (it is different!).
Our business plan requires early stage investment to develop and test our retrofit technology for 2 stroke engines. Eventually, if we sell enough of these, our revenues will exceed our costs. At that point, we have several alternatives- to reduce price to drive market penetration, or to use excess as R&D for other environmentally advantageous technologies for the developing world. By using a non-profit, we can focus on these mission driven alternatives, rather than return to investors.
We have consciously followed more of a traditional start up path, seeking investment from our donors and investigating many sources of funding. Significant donors have been given board seats, and a significant role in company operations. I won’t argue that this is the “best” model, but it is the model we are using, and it is one that is understood and appreciated in our area (Colorado). So far, we have been very fortunate- most everyone that hears about what we are doing wants to help out!
So, soon after forming, we applied for 501(c)(3) exemption. This was a difficult process. Not, I think, because the IRS didn’t like our business model, but because our agent would “disappear” for months at a time. The main questions during review centered on executive compensation issues and making sure we didn’t have any undisclosed conflicts of interest. It took 14 months (vs. the estimated 3-6 months), during which time it was very difficult to approach potential funders we didn’t know. Fortunately, our early funder, Bohemian Foundation, was very helpful during this period. Just as with a good early stage investor, they have provided much help, advice and expert assistance.
With respect to compensation, one issue with the non-profit that can be a challenge is that you can’t offer equity. We want entrepreneurial people to work for us, and this is hard. We know that we will miss out on good people, particularly if the job market really tightens up again. Luckily, there are lots of excellent people out there and so far we have been very fortunate to get some of them to work for us. The way we have handled is to offer competitive salaries and a performance based bonus plan. We also have a company philosophy to reward those who help us build the company with salary increases to stay commensurate with peers at similar sized companies. As we put it to the team, though- “we eat what we kill”. Money can come from donors or customers. No money, no company. Very much like any start up. Not perfect, but the best solution we have found so far. Of course, the idea of peer based compensation will only come into play once we are running on sales- early investor money is being focused on building the business, not compensation. At this time, several of our senior executives have been working without any pay (actually, we have funded some of company’s needs from our own pocketss) But we are recruiting a full time Executive Director at this time, and this likely will be a part of the negotiations.
As far as interactions with others… so far it has not been a problem- no one has been “put off” by our structure. We recently entered into a technology license with a large public company. They were very supportive of what we were trying to do, and our non-profit status was not an issue in the negotiations. We are also setting up suppliers in US, Europe and Asia and so far, our corporate form has not been an issue.
Interestingly, as a non-profit, we cannot get funding through SBIR grants- I can understand why they wrote the rules this way, but this might be a constraint that a policy change could address if this is a widespread problem for non-profits.
Costs for setting this up have been pretty low, but I have done much of the work. We got some great help from an attorney at Faegre & Benson in Denver on the IRS issues. We hold regular board meetings, and corporate governance is pretty straightforward. We have a CPA help with our books and do quarterly financials. We run a monthly/annual budget, with variance analysis.
The biggest question I have about the non-profit approach is scaleability. If we are successful, we will have to carry and finance a very large inventory in our supply chain (several hundred thousand dollars). Whether suppliers, banks or other capital sources will finance this is a concern. If not, it will definitely reduce the impact we can have on the world. We have some ideas, but a lot more needs to be done.
Some additional items for this group to consider:
a) A recent article in Harvard Business Review is very critical of non-profits efforts at trying to make money. “Should Non-Profits Seek Profits” March 2005. It is a very good article, and should be considered carefully. Presumably sophisticated donors will be asking the same questions (and they should be!).
b) Please read Mario Marino’s report “High Engagement Philanthropy” which can be viewed/downloaded at http://www.vppartners.org/report2004.html
c) More info on EnviroFit: http://www.envirofit.org/
d) Jim Collins, author of Good to Great, spoke in Fort Collins in January. He studies the qualities of enduring, successful companies. Interestingly, he is now looking at the differences between for profits and non-profits. While some things are the same (Hedgehog Concept, Flywheel, etc. and I think Good to Great is a great book for non-profit execs) he believes some of the leadership skills are quite different. It was very interesting and I hope that he writes an article on this work.
Good luck all, this discussion is very valuable. I hope this helps some of you as you work through these issues.
Ref “this hybrid activity is part of an emerging sector of organizations at the intersection….and other models (see attached diagram)”.
The diagram is too big for my screen or my printout – can you resend in a different format?
I love your expression “As a For-Benefit practitioner….”
I had the same problem. Save the file as a JPEG file and then open it on on your “explorer” window. That should help and you should then be able to manipulate the size of the picture.
thanks I will try that.
I have some questions.
How would a young social entrepreneur who wants to address a social issue make a decision as to the type of venture to pursue?
If for example, a social entrepreneur wants to enhance the economic development in a rural community that is unique for its handicraft that it produces.
What should the social entrepreneur do? The idea that comes to mind is to set up an enterprise that markets the handicraft through e-commerce.
How would you teach a young social entrepreneur to choose the appropriate type of for-profit/non-profit venture?
So here’s a new one for you. I run a 501 (c) 3 publicly supported charity called Play Rugby, Inc. We’re in the early stages of development having been operating part-time until March, 2005. We provide educational and development services to children in urban areas, through the sport of non-contact rugby. Our philosophy is to develop youth through rugby. We do this by providing coaching support to educational organizations, in addition to running our own rugby clinics for children aged 5-15 years of age. The idea is to give kids the opportunity to learn new skills, develop new values and make new friends through rugby that will enable and motivate them to set and achieve new goals in life. It’s all free for these kids as we work from grants from the educational organizations that we are involved with, although ultimately as we grow we’ll need larger donations/grants. We’re passionate about passing on the benefits of this fastest growing youth sport in America to kids that may well never otherwise be given the opportunity to play it. So far, it’s working!
As we develop our business over the next few months, we will be seeking charitable donations and grants to support it. However, to provide additional support we are looking to set up 3 for-profit businesses – a fee based holiday camps business, an equipment business and a interative media portal (through a website currently in development). The question is what’s the best way of doing this? We want to attract some investors and as an entrepreneur I want to grow these businesses in a cash flow positive and profitible manner. However, I also want these business to (over time) provide certain financial support to the non-profit business, to enable the non-profit to grow more effectively than it might simply from independent grants/donations etc. I was thinking of putting these companies under an LLC holding company which could be partially owned by the 501(c) 3 business (to formalize the business relationship), partially by the founder and partially by individual/corporate investors. What are the advantages to including the for profit entities under such a hierachy as opposed to having the LLC (or equivalent) set up as a separate sister company with a management agreement rather than official ownership? What would be the optimal way to set this up to allow such businesses to operate an entrepreneurial for-profits (thus attracting investors), while still benefitting the non-profit?
Said Business School, Oxford
I don’t know if this discussion has been dormant for too long to try to bring it back to life, but here’s hoping someone out there is reading this!
Two questions: To Jesse Patel, my understanding of your post is that you know of an example of a for-profit company having in its structure the requirement of giving 100% of retained earnings to the NGO. Can you share who this is?
On to the meat of my post: I am an MBA student studying business and social entrepreneurship at Said Business School, Oxford (thanks to a scholarship from the Skoll Foundation). This term I am working with a team of students on writing a business plan for a social enterprise. I’ll try to describe the project briefly:
– Based in Transylvania, in Romania, there are several small villages in which high-quality, organic Arnica Montana, a medicinal plant used in herbal remedies, grows.
– Currently the local people who harvest the flowers from their land are paid very little (about .30 Euros per fresh kg) by local traders who then pass the product along through a complicated supply chain.
– Through a partnership with WWF/UK, we are working to establish and operation that will cut into the supply chain by adding value to the flowers by drying them on-site and selling directly to a major herbal remedy company.
– We are looking at a hybrid structure in which the for profit company (in Romania called the “LTD”) conducts all trading, giving fair wages to the collectors and exporting the dried product to the buyer in Germany. The NGO side will own all the drying equipment and will receive money from the LTD’s revenues in order to fund its work and to pay subsidies to the landowners to keep 1/3 of the flowers on the fields each year, in order to ensure sustainability.
Due to Romania’s complex and ever-changing legal structure, this is going to be a bit tricky, but that aside, we are working through some issues and could always use input. I will keep it brief in the fear that this thread has been retired; however if there are responses I will be happy to provide more information and more questions?
Some of the basic questions:
– If the NGO owns the drying equipment, should the LTD have to rent use of that equipment in order to dry the flowers? My thinking is that this would ensure a revenue stream for the NGO from the beginning, but I haven’t fully examined this idea for potential pitfalls.
– Due to the Romanian legal structure, our lawyer in Romania has advised that the best structure will be to have two separate organizations, with the NGO holding a 20% stake in the LTD. This is because the way NGOs work in Romania would allow anyone and everyone to join the NGO as “members” and have voting rights on all decisions. If the NGO wholly owned the LTD, this would create an unwieldy system for making business decisions, and it would have the recipients of benefit from the LTD (i.e. the harvesters) potentially setting their own wages, to the long-term detriment of the business’ viability. However, we want to really pick this structure apart to ensure we are putting in place the appropriate safeguards. We would appreciate any brainstorming you all can help us with on where you see gaps in this system!
Thanks in advance for your help…hope to hear from some of you soon!
Center for Civic Networking
For a long time, at least one Howard Hughes’ companies (Hughes Tool, perhaps?) was completely owned by the Hughes Medical Foundation – with the implication that it got to vote all the stock. Eventually they sold it and added billions to the Foundation’s endowment.
I’m also in the UK where we incorporated P-CED as a company limited by guarantee with no shareholders, allowing us to direct 100% of profit to community benefit. Naturally, that won’t help much in Romania.
We’ve been working out in Ukraine where the only option available to us appeared to be to set up a standard company. There it’s necessary to define the areas of trading more explicitly, so we registered for around 60 activities. We’ve been advised, only informally, that the nature of what we’re doing, ie a profit for poverty operation should render us free of local taxation. As you will know from your own experience, nothing is fixed for long in law there.
For us, the in-country operation is a means of survival, though along the line we’d like to stimulate our local activist friends to lobby for a legal community benefit structure allowing us to replicate the profit for poverty model to create new SMEs with the same principles.
As we can’t do this right now, we see the approach being to license a business model such that a community benefit ideal is adhered to. This will depend very much on having a territorial agreement with any third party whose products we import.
What we’re doing out there mainly is creating an econdev proposal and one component of the proposal is to create community benefit SMEs.
We’ve attempted but not succeeded in establishing export markets for food produce, others have made small steps.
Anyway, I’m interested in what you’re doing in Eastern Europe as that’s been the P-CED target for some years now.
I’m the founder of alonovo.com. We are working to change the corporate charter by connecting social responsibility to the profit motive by educating and informing marketforce demand. We are a front end to Amazon and have integrated trusted corporate behavior ratings (CSR) directly into the point of purchase for online shopping. When people come to alonovo.com to shop, they get the entire Amazon catalog and Amazon’s competitive prices with our Corporate report cards.
We believe this will have an evolutionary impact on the supply side of shopping transactions -it will cause some measure of competition for product sales and create consumer affinity for product from manufacturers and merchants that are reducing their environmental impact, leveraging renewable clean energy and treating their workforce well.
Beyond this, we share 40% of our revenue with non-profits and NGO’s. Instead of traditional advertising we decided to use what I call “Grasslawns activism” as our first wave of visibility in the market.
I left Oracle Corp. a year ago to found and fund alonovo.com, and we went from concept to production in less than 5 months (April – August 2005). Based upon my knowledge of angel investment and VC, we started going after a small private equity deal that would capitalize alonovo.com beyond the 350K of my own money that was necessary to fund development and operations. I felt that since we were (and still are early stage), it would be better to begin transacting in the market before raising the additional 600K that we required. In hindsight I was over optimistic. Traditional VC (we spoke casually with the ex-CEO of Kleiner Perkins) looks at us as nothing more than Yet Another Ecommerce Site. And as our approach has been apolitical (intentionally -as we seek to reunite the American community as a large, informed marketforce -instead of continued political polarization, most of the progressive individuals with significant access to capital look at us -and must simply yawn and say next.
So I’m left with what Joel Makower has called “One of the most powerful tools for social change ever placed in consumers hands”, sputtering along with no capital investment other than my own -and I recently sold my house squeezing the last bit of capital I have access to and putting it into something that I think will be a great legacy -something that fills the ozone layer of a free market (or theoretical free market) economy by balancing the profit motive with people and planet -instead of the profit without regard for anything else economy we have seen that has been fueled by “trickle down economics”.
In hindsight, I would have established a non-profit element which was geared to the integration and normalization of social responsibility data, and seperated that from the commerce side of the venture. This would have given us the option to raise foundation money. While I did not want to pursue this option at all -the alonovo model is intended to provide funding for non-profits -not compete for funding with them, it would be better to have had the option and not have to run the business from out of my Prius.
This discussion has been long dormant, so I’m not sure if anyone will reply to this post – i’m hoping so! This discussion is really interesting and a subject some friends and I have be pondering as we consider embarking on a venture. Our idea, without going into the details of it, is to generate income from our activities in a way that sustains us and the time we put into it, while having a distinct non-profit focus for some of the events we organize where all donations/fundraising/matching sponsors will be channelled to community projects through the non-profit arm. Is it possible to have an LLC parent company with a non-profit subsidiary under its umbrella? Is this a legal minefield? Better done the other way round? I’m a self-confessed novice when it comes to business models, so I would appreciate some advice further to the discussion to date.
Is there a reason that one would have to be controlled by the other? Why not two distinct entities?
You may want to take a quick peak at the Tides Center (tides.org). They handle admin. and infrastructure for non-profits and may be able to guide you as to structure.
Seconding George here, they would seem to be two discrete start-ups. A hybrid might be applicable to existing profit and non-profit entities aiming to combine forces for social objects otherwise it seems an unneccessary complication. If your business activity can sustain the social aim as well as yourselves without charitable donations, then why not write these aims into the company agreement? For example Mark Grimes is developing a business model known as NED along these lines with a commitment to apply a fixed percentage of revenue to benefieciaries, my organisation P-CED uses a model based on 100% surplus to community benefit and if you live in the United Kingdom you could create what’s knows as a Community Interest Company (CIC).
thanks for your replies – the reason i saw them having to be linked is because the LLC would be the operating arm of the venture(s) and would earn an income off it, at least enough to sustain its activities and start new ones. Funds raised through the venture(s) itself (advertising/charitable donations/matching funds etc) would be channelled directly to charitable projects. Does that make any sense?!
I am in the process of developing a business plan for my consulting practice. However I feel really inhibited by all the structures that discuss developing a business plan, because I truly want to vision/mission driven but still make enough money to warrant the effort. My consulting practice is currently a sole proprietorship that I will convert into an LLC at a later point in time. The practice will focus on program evaluation and change agent strategies specifically targeting youth services, diversity programs, sexual and reproductive health, and the intersection of them all. Feel free to email me any suggestions: firstname.lastname@example.org
Noesis is a UK based consultancy isn’t it? If this is the case then the most obvious form of incorporation is the CIC which may be registered with our without shares.
I’ve been aiming in a similar direction with my software business over the last few years and recently decided, following the death of a colleague, rather than any social enterprise specific structure, that I’d split the revenue between two businesses. One maintaining the UK sales and consultancy effort, with the maintainance and support operation donated to to another operating as an overseas social enterprise. Prior to this I’d been sponsoring the social enterprise from my taxed income.
So hopefully, what I’ve done will expand the business activity and also release me from the constraint of being on call for support work. Given the disparity in income standards between here and the country of operation, the support revenue which could barely justify a minimum wage for one person here, will support 3 people and fund operations for the target operation, namely exposing Death Camps for Children in Ukraine which I promote unashamedly here because we really need to bring some media attention to this issue and very few are listening.
Jeff Mowatt P-CED
Since, this is still open, I was wondering if you guys would provide some insight for me. ASC Ventures stands for Arts for Social Change, and I have a variety of services, such as a Film Production Company, Cultural Center, ASC Fund, etc… Each subsidiary company will have art attached to it, solving or attempting to solve a social issue.
For business planning, will I have to create one big plan for ASC Ventures and smaller business plans for each subsidiary?
If each is a separate entity with its own business model for sustaining operations, each should stand on its own. If there is a main entity, and all others financially roll-up into one financial reporting structure then you could have one plan with a section for each entity.
So, it really depends on the legal and financial reporting structures.
Hope this helps,
Hello. My name is Matthew Karenke. I work with Global Change Multi-Media in Sedona, Arizona, USA. We are a 501(C)3 organization and at the same time, are walking into territories where we could be generating funds from some of our media products, including “acknowledgements” from “donations” in the form of video clips or logos on our website or during our live Internet broadcasts. I’m wondering if there are any references how we can potentially form this type of hybrid while staying within the guidelines for 501(C)3 organizations.
Wayne G. Walker
Question for anyone here. The US Senate just passed new and tougher laws on the management of foundations and non-profits as part of the Pension Protection Act of 2006. The provisions are expected to be signed into law soon. Anyone know how these provisions may affect the use of the hybrid non-profit for-profit enterprise structure???
If you have any insights, we would REALLY appreciate hearing about them.
There aren’t many examples on the web on hybrid structures. This is because it is a fairly new concept. We have structured our own organisation as an hybrid. We couldn’t find a structure that would address our own unique vision … so we created one.
In turn this led to other issues regarding the identification of the correct legal platform to encase our vision. (It has taken us over 12 months to find it)
Tell us a bit more about your idea … and I am sure that between all of us here we will be able to assist.
You may e-mail me at: email@example.com as I do not always have the time to brouse this site.
Entrepreneur returning to his social entrepreneur roots
This is a great conversation!
I am looking at a dual structure which essentially is two organization:
1. a for profit organization, structure it as you will. Typical would be C-corp, Delaware, etc.. – however, at least 1% off the top to non-profits, 1% of equity to the foundation, and 1% of time spent directly the social mission by employees. We are looking at making this more like 1%, 10%, 10% (half a day a week on employee directed non profit work).
2. the foundation, associated with the for profit company. I see this as being similar to the salesforce.com foundation — but with a greater percentage ownership. I’m also thinking of utilizing some of the approaches Working Assets took to nominating, vetting and voting upon non-profit recipients.
Finally, we are hosting these and other thoughts — at a new blog: socialstart.typepad.com
Please take a look at the blog — and react to what you see there and tell us what else should be added. We’re trying to post daily and frankly a lot of YOUR stories you reference in this discussion would make great posts. We would love to welcome you as guest writers.
I’m the founder of Titans Academic & Athletic Program, a Non-Profit holistic youth development program. We are thinking of creating a For-Profit LLC to run our Adult sports programs and ventures. We would also try to attract investors through this LLC for the purpose of building a sports complex to house our programs.
Are we heading down the wrong path?
Social Entrepreneur Evangelist
I am a Technology Consultant looking for ways to create Hybrid Enterprises.
I am glad to see a grass roots of organizations that are looking at this process and understand the relevant need to spawn organizations with both Enterprise capacity and the “evangelistic heart of a good Non-Profit” endeavor.
I just happened upon this duscussion and although it began in 2005, the timing is perfect for me.
The Chickasaw Nation, a Native American tribe in Ada, Oklahoma and a sovereign nation within the USA, has as one of its departments, the Division of Housing and Tribal Development. We are researching a for-profit arm that could earn income by providing mortgage services to homebuyers beyond tribal members, and yet channel funds back into the programs and services the Nation offers to tribal members. We also need to be able to increase salaries to the for-profit employees.
Our biggest issue is if we can create this for-profit piece under the Nation, under the Division of Housing, because it may need to sign contracts that would bring into jeapardy or question the sovereignty of the tribe. The Division of Housing does not want to lose what it currently has – a very successful housing program and staff, but will not sign contracts that include any language that would limit their sovereigny immunity. I am looking for the best of all worlds and don’t know if it exists or can be created within an existing legal framework.
I have also been researching CDFI’s, CDC’s, and Social Enterprises as possible structures for this new venture, but I would love to hear any advice, warnings, stories or blogs from your body of experience.
Amrit Singh Khalsa
We’ve had a lot of success with the following structure: 1. a foundation that owns the stock of a holding company that owns the stock of several for-profit companies (approx. $600M in revenues) 2. The foundation manages several non-profit organizations via controlling the board members and needing to ratify decisions of those boards. 3. A second foundation that receives the tax-deductible donations from the for-profit businesses. Do to tax reasons, this foundation must be independent of the other structure, but it has a similar mission statement. This allows the businesses to donate 10% of their profits tax-deductibly. And then the non-profits can apply for grants from this second foundation.
This structure allows the common foundation to manage the businesses in a conscious way, giving their 10% of profit donations and doing other socially responsible activities, and to find synergies between the for-profits and the non-profits.
I’d welcome anyone who’d like to know more about how we’re structured to contact me at firstname.lastname@example.org
I founded Venture Bank www.venturebank.com and now have been expanding to new countries with local partners. I feel the venture model to support emerging growth companies should also have a sub plan to integrate social programs that impact the local communities. I’m expanding to China and Africa right now focused on ” For Profit” ventures ; however, I’m exploring deals that can also have a environmental and social impact . I really love the rootsofpeace.org model that help the local people create their own future with agriculture and the removal of land mines. I’m also trying to explore the Micro financing model and how this could be partnered with some of my partner projects. Thank you group for all the new ideas and vision !
In launchingwww.co2action.com I have been looking for a model to address the issue of Climate change and acheive a personal goal of initiating a reduction in Co2 emissions by 1million tons. I firmly believe that a for-profit business can accomplish great things at lower cost than many non-profits.
I’ve found some non-profits implementing similar projects have a cost structure that is 2-10 times what it will cost me to accomplish the same thing in a for-profit model while making a reasonable profit.
Another area I’m focused on is energy conservation where I expect to enter into private-public partnerships and apply capital to public sector projects in a more efficient manner.
As an attorney who represents quite a few entrepreneurs who are trying to pursue business and social objectives, it has been fascinating to watch this discussion continue over time. I’m surprised that there aren’t more attorneys participating in this discussion, as the legal and tax issues often form the core of the challenge.
It looks like the “hybrid” is still fundamentally viewed as a combination of for-profit and non-profit entities collaborating or cooperating to achieve social and business purposes at the same time. This is understandable, as the U.S. legal system really doesn’t provide much of an alternative. However, I think we need to start thinking beyond this approach if we are really going to get create a proper hybrid that will unlock entrepreneurial energy and capital in ways that are simply not possible under current law.
First, a bit of background. 501(c)(3) organizations in the U.S. are permitted to engage in business activities, but they still have to be operated “primarily” for charitable purposes. That means they can operate like a business up to a point, but if their business activities are substantial and not directly related to a charitable purpose, the organization may lose its tax-exempt status. Plus, they can’t sell shares, so they are pretty much limited to debt to finance their operations and growth. Finally, there is a prohibition against “private inurement,” which means that profit participation and many types of business arrangements that are common in the for-profit world are not permitted.
For-profit companies, on the other hand, are formed for a business purpose, and the managers of the business owe a duty to maximize return for the owners (i.e., shareholders). Of course, for profit companies can operate in a socially responsible manners, and may conduct charitable activities, but if these activities are substantial and don’t directly serve a business purpose, shareholders may successfully sue the board and managers of the company and may recover damages, among other things.
A 501(c)(3) can set up a wholly owned for-profit to carry out its business activities, and this works well so long as outside investment isn’t needed. But once you add outside investors, certain IRS tax rulings come into play and the charity may be prevented from actively participating in the business.
Similarly, a business can create a corporate foundation, but ultimately the company cannot contribute funds to the foundation in a way that would impair its own ability to do business or run contrary to the interests of shareholders.
The most interesting option under current law is a joint venture, using an LLC or some kind of joint operating agreement as a vehicle for the enterprise. IRS rules permit this, but the charity either has to control the joint venture, or it has to have “effective”control of those aspects of the joint venture which are related to its exempt purposes, AND the joint venture cannot constitute a substantial part of its activities. And the charity’s involvement still has to tie in directly to a charitable purpose, and benefits to outsiders are restricted. That is pretty limiting if you really want to conduct a successful business at a medium or large scale.
In many ways, having a charity invest in a for-profit business, and enter into consulting contracts, leases, or licenses as a way to generate a flow of income (which could be substantial if the business is successful) is actually a better approach.
At a recent meeting hosted by the Aspen Institute, a number of very bright people got together to discuss ways to create better alternatives. There were several interesting ideas presented, including an initiative to get the IRS to recognize a new type of designation for “socially beneficial” enterprises (which might include for-profit entities), and the creation of an entirely new form of entity which might be called a “for-benefit” company, the details of which are still under discussion (but it will almost certainly include new options for governance and ownership beyond what people are used to.) Several states have expressed interest in creating such an entity under state law, although the IRS will still have to determine how such an entity will be treated for tax purposes. That’s not trivial, but neither is it the most important aspect of what social entrepreneurs need in a proper legal vehicle.
My own view is that it will take another 3-5 years, but we will eventually see a significant change in the legal environment for these hybrid ventures. I would especially be interested in hearing from other attorneys who are working on new legal and financial models for social enterprise.
Allen Bromberger, Esq. Perlman & Perlman, LLP New York City
Hi Allen (Bromberger). Thank you for the info. How interesting. I have started in earnest on this journey and need immediate focused assistance on wonderful new project–very timely and brings so much of my life’s work together. If there is no chance of the IRS allowing for the “for-benefit” company structure until 3-5 years from now, what can I do until then to set up scalable, legal organization/s that sync up and support one another with relative ease? I may have stumbled upon a new social business model. Maybe, maybe not. If not, I’ve not seen it done yet and would love to hear from anyone who knows of someone doing this sort of thing. One way or another I’d like to use this coming year to prove the model works via some high profile sponsors who are seriously forward thinkers. Have the contacts, experience, skills and vision but need the sort of expert advice you seem to have(?) I’m on a fast track and want to hit the ground running first thing in ’07. Any ideas of who to speak to?
In 1994 we started a 501c3 psychoanalytic preschool in Ann Arbor, Michigan, as a collaborative effort of psychoanalysts and educators. Our mission is to support and foster healthy parent-child relationships as the best foundation for learning, kindness, and strength. We quickly ran into the familiar non-profit circular dilemma of needing a program to demonstrate in order to raise funds to rent premises, but no funds, etc. So we formed a limited liability real estate corporation to build a suitable property. We sold 25 shares to people who were comfortable with supporting the non-profit by offering the building rent-free for the first two years. Within a year-and-a-half, the school was able to start paying rent, so there was enough income in the corporation to pay mortgage and taxes etc. In eight years, the school raised enough money to buy the building at cost, thereby freeing the annual budget of a large rent item, and acquiring an asset that allowed much greater financial flexibility and stability. Investors in the LLC realized a break-even cash flow, plus the ten year long tax benefits of no appreciable profits. So this is a model that can be done on a small scale, involving local people who might otherwise never know about a paritcular non-profit, in getting it off the ground.