(Image by Alicia Bramlett used courtesy of Harvard Social Enterprise Conference via a Creative Commons license)
Tivoni Devor’s “Getting Good Done” column focuses on new models of enacting impact.
Social entrepreneurs should not limit themselves to a single legal entity.
If your company’s social mission is more than just window dressing or a marketing tactic, it’s important to have both nonprofit and for-profit entities working toward a singular mission.
There are many benefits to having an associated 501(c)3, including access to a new type of capital. While nonprofits and foundations have the ability to give directly to a for-profit via a program-related investment (PRI), most foundations do not like the extra work involved, and few nonprofits are set up to provide grants to for-profits.
That’s why having an associated nonprofit is a great way to capture that money and fulfill a mission-related program or product. If you run a service-based business with a price point that’s out of reach for some, creating a nonprofit scholarship fund is a great way to subsidize the price of your service for low-income individuals who would benefit from access to your service.
For many social entrepreneurs, those benefitting from their business — your end users — are often not the buyer or provider of their product or service. For example, say you develop a type of edtech software. Your main customers are going to be schools, and your end users will be school children.
Without a dedicated associated nonprofit that is singularly focused on your business’s social mission, you will have to rely on other nonprofits to enact your social good.
It’s a given that schools are not bursting with cash, but there are many companies and foundations that would be willing to buy your product for the promotional or social benefit associated with helping the kids using your service. But companies want their purchase to be tax-deductible, as it’s basically a donation anyway. And again, foundations are often not set up to provide a PRI as easily as they are to simply give money — and they’re not set up to implement programs.
Without a dedicated associated nonprofit that is singularly focused on your business’s social mission, you will have to rely on other nonprofits to enact your social good. But it could be bad news for your business or brand if those separate nonprofits you partner with have changes in leadership, mission or funding not consistent with your own values.
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It’s not as easy as I’m making it sound — the nonprofit can’t simply be a shell to move money around. There are many IRS regulations about how the money flows that, if broken, will get you in a lot of trouble. It can also be expensive to set up an independent 501(c)3 — $2,000 to $5,000 — and risky if not designed just right. There are firewalls that need to be maintained around control, decision making and funds.
Every cent must have a paper trail, and most importantly, the nonprofit you create must have enough independence to choose the best vendor to fulfill its nonprofit mission — even if it is not your company. A nonprofit is managing what are essentially public dollars, as they are tax-free, and has a responsibility to get the best service possible at the lowest possible price.
Having the expertise to navigate the nuances of doing this the right way is rare, which is why it is not a widely held process.
Having the expertise to navigate the nuances of doing this the right way is rare, which is why it is not a widely held process. You often see that only the biggest companies have their own foundation or nonprofit venture associated with them.
There is a class of nonprofits out there whose primary mission is to provide these types of services. Fiscal sponsorship is the technical term for an umbrella nonprofit that provides back-office nonprofit management services and allows programs to operate under their 501(c)3. (Full disclosure: Urban Affairs Coalition, the nonprofit I work, for does just this.) There are several in the city and many across the country that have the ability to create a turn-key nonprofit that would allow you entry into the nonprofit world quickly, cheaply and with experts guiding you along the way.-30-
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