Myth (And Facts) About Nonprofit Social Enterprise

Nonprofit management and strategy topics seem to come in waves for me at Propel Nonprofits (formerly Nonprofits Assistance Fund). The theme of the last quarter seems to be earned income and nonprofit social enterprise.  While the specific questions and ideas vary widely, there are some ongoing myths about social enterprise that I hear over and over that need to be dispelled. The myths fall into three categories:

Myth #1:  We can’t do that!

We can’t charge a fee for services, we’re a nonprofit.

Tell that to all the nonprofit hospitals, clinics, colleges, orchestras, and theaters. Of course nonprofits can charge fees for their programs and services. Not every nonprofit can, should, or chooses to include earned income in their business model, though, for all sorts of mission and community reasons.

We’ll lose our nonprofit tax status if we have too much earned income. 

Income that’s earned by providing services or goods that directly contribute to a nonprofit’s mission is considered “related” income. Think about the hospitals, colleges, and theaters above. It’s only when a substantial amount of income is earned from activities that are unrelated to mission that this is even a consideration. This is a legal question, though, and deserves professional advice.

We’ll have to pay taxes (or, the dreaded UBIT problem.)

Similar to the answer above, most nonprofits with earned income never have to file an Unrelated Business Income tax form. Even if you do, though, what’s bad about paying tax on a profitable business?

Myth #2:  We have to do this!

We can’t miss out on the newest trend for nonprofits.

Social enterprise businesses within nonprofits are not a recent development. Consider Goodwill, YMCA, Girl Scouts, and Minnesota Diversified Industries (MDI.)   The current interest and enthusiasm is driven by both nonprofits’ search for alternative income sources and growing consumer interest in supporting socially responsible businesses.

A social enterprise will spin off profits that can support our charitable work.

Maybe. There are social enterprises that generate profits for the nonprofit, but in reality many social enterprises aren’t fully profitable without some subsidy of their own. A landscape business that employs people recently released from prison and provides workforce skill development and supportive services will have higher supervision and labor costs than a private business landscaper. This enterprise truly has a “double bottom line” that’s worthy of support.

Every nonprofit should start a social enterprise.

Earned income isn’t a good fit for every nonprofit for either mission or organizational reasons.  Start with this question: is there a service or product that your organization has the capacity to consistently deliver well, that furthers your mission, and that meets an actual demand from customers who will pay for it?

Myth #3: How hard can it be?

Current staff can run the enterprise in addition to their other programs.

Planning, launching, and growing a new business is a big job and needs attention and skills. You may have someone on staff that is perfect for the role, and you may not. During the planning stage, research the skills and experience needed for the business and then recruit and support staff to be successful.

Customers will buy from us because we’re a nonprofit.

The nonprofit mission and reputation can attract initial attention and willingness to try your service, but over time customers will buy from you because you offer a service or product that they value at a price they are willing to pay. This is a complicated dynamic, of course, that includes brand value, competition, and marketing, but it’s risky to assume that the halo effect of nonprofit will drive sales.

My friend/co-worker/mother loves the idea and say they’d buy it.

Don’t skip the process of gathering in-depth research about the market for your product or service. Who is the customer, what do they value, what will they pay, how often, what’s the competition? Be honest in discovering whether or not there is a large enough bona fide demand for what you’re selling. “I think it’s a great idea” is not market research.

Look past the myths and learn more about social enterprise. We had a great discussion on this topic at Sustain-A-What hosted by Pollen. Find someone who was there and ask about the lively table conversations, and read this related piece by Dameun Strange, Adapt to Survive.