This approach ignores the fact that nonprofits’ markets usually consist of clients who are not profitable to serve—because if they were profitable to serve, the for-profit sector would be serving them. The better a nonprofit is at finding and serving its market, the poorer it will be, because though for-profit clients are a profit center, nonprofit clients are a cost center.
Fine, say the hybrid-benefit-earn-your-own-revenue people: so start a profitable business and funnel its profits into the charity. But this notion of a two-headed agency is, like most similar creatures, a monster. If nonprofits expend their limited energy on creating market-based revenue streams, they’ll be diverted from their mission-based activities. Either the marketing strategy succeeds, in which case the profit-generating people gain the power within the organization and mission falls to a sad second; or the marketing strategy fails, in which case it has consumed significant resources that should have gone to serving clients.
There are, of course, institutions for which running a business can be part and parcel of mission, for instance, job-training centers. But for mental health agencies, arts organizations, group homes, rape crisis hotlines and most of the other charities which do the important work in our society, running a business is a dangerous distraction.
What if, instead of spending time telling nonprofits how they should operate differently, business people re-examined their own operating principles? What if every business set aside 25% of its profits for investing not in the business itself but in the wider community?
In other words, instead of asking why a charity can’t be more like a business, let’s start asking why businesses don’t operate more like charities. Businesses receive all sorts of public services and protections, from the enforcement of contracts in the law courts to well-maintained roads along which to distribute their products. Why shouldn’t they be expected to contribute to the public good in return?
Most business people would say, “But our primary duty is to our shareholders, not to the public good” (and those over-influenced by Ayn Rand and the University of Chicago economics department would say “Our SOLE duty is to our shareholders, the public be damned”). Right: and the primary (or SOLE) duty of charities is to their/our clients. Anything that takes nonprofits away from that activity is perforce improper.
What’s the point of this thought experiment, in which charities chide businesses instead of the other way around? Simply to demonstrate how much business advice to charities is sheer nonsense. To presume that the voluntary sector doesn’t make a profit because it hasn’t thought about how to do so is to fundamentally misconceive its role in the wider economy.
Besides, what nonprofits need isn’t more advice: it’s more money. When business people are ready to provide that—when they’re ready to serve on Boards not as agents of disruption but as securers of resources; when they’re ready to advocate for a tax system which will underwrite the necessary work done by the voluntary sector—well, THAT will be the time for a press release.
Tags:nonprofit, not for profit, Marketing, charity, philanthropy, Board of Directors, volunteer, philanthrocapitalism, governance, Poverty, Advocacy, Mission, Nonprofit management, social entrepreneurship, Private Philanthropy, Boards of Directors, nonprofits, 501c3
Posted in Private Philanthropy, Nonprofits--General, Coverage of nonprofits, Current Affairs, Boards of Directors, Philanthropy and Taxation, Marketing, Volunteers/Volunteerism, Poverty, Advocacy, Earned income, Mission, Nonprofit management, Finances, Technology, Social enterprise | 9 Comments »
March 17, 2011
Here’s something strange: a concept thrown around routinely and casually in conversations among nonprofits and philanthropies is simultaneously the subject of fierce debate and sometime disapproval by the Internal Revenue Service, a committee of the American Bar Association, and other experts. What is going on?
The notion of Low Profit Limited Liability Corporations (L3Cs, for short) is that they’re a vehicle for doing well by doing good and therefore an improvement over the typical nonprofit structure. L3Cs are permitted to earn profits but proponents claim that their praiseworthy intentions—to end hunger or provide clean water or whatever—make those who lend to them eligible for the special tax benefits attached to program-related investments. In other words, this is a legal structure presented as a technique for gaining access to capital (always a struggle for nonprofits) by providing a tax benefit to lenders.
Of course, foundations already get a tax benefit for program-related investments in regular nonprofits, so what, exactly, is the appeal? In theory, foundations might be more interested in program-related investments that generate a reliable flow of capital (in the form of profit) than in program-related investments that generate nothing but additional nonprofit programs and services. Likewise in theory, regular venture capitalists outside of foundations will be more interested in making investments in profit-making entities than in pure nonprofits. This—the notion goes—will increase the amount of capital available to support general good-guy behavior.
However, a number of scholars and lawyers (Daniel Kleinberger of William Mitchell College of Law prominent among them) see the L3C as, at best, redundant and, at worst, an invitation to fraud. They point out that regular limited liability corporations can be organized for any purpose, including public-spirited and low-profit ones. They point out that the IRS has not yet issued (and does not seemed inclined to create) a rule awarding automatic program-related investment status to any investment in an L3C. So anyone who invests in an L3C on the basis that it provides a higher return than a regular nonprofit with the same tax benefits will find out to his/her sorrow that this is not the case.
What strikes the Nonprofiteer as peculiar, though, is that in the many discussions she’s heard and read about L3Cs, only one mention (specifically, Professor Kleinberger’s Nonprofit Quarterly article) has ever surfaced of this opposition from the bar and Federal regulators. Not until her tax lawyer Stuart Levine asked about the [successful] efforts in Illinois to create L3Cs did she realize there was anything controversial about the phenomenon. After bringing her up to speed Levine wisely said,
L3C’s don’t work unless there is a change in federal tax law. In other words, L3C’s are a little like Oreo-Tycin-Myacin—the wonder drug for which there is no known disease.
L3C’s raise difficult issues of fiduciary duty and the inherent conflict between “charitable” purposes and “business” purposes. At the least, these conflicts cannot be dealt with via a quick-fix state statute.
Doubtless the Nonprofiteer spaces out on frequent occasions and misses aspects of what’s said or done in the sector. But she suspects there’s also a disconnect between what nonprofit executives and L3C promoters expect and describe and what lawyers and regulators understand.
So if you’re considering investment in an L3C, be the aware buyer of whom you’ve heard.
Tags:501c3, charity, Executive Director, Executive Directors, foundations, Fundraising, IRS, L3C, low profit limited liability corporation, nonprofit, Nonprofit management, nonprofits, not for profit, philanthrocapitalism, philanthropy, Private Philanthropy, program related investments, Relations with funders, social capital, social entrepreneurship
Posted in Coverage of nonprofits, Current Affairs, Earned income, Finances, Foundation Hall of Shame/Stupid Foundation Tricks, Fundraising, Investment, Nonprofit management, Nonprofits--General, Philanthropy and Taxation, Private Philanthropy, Relations with funders, Social enterprise | 8 Comments »
November 19, 2010
More about the troubles of the do-well-by-doing-good gang, this time in the financial services sector.
Which raises the question: when does “profiting” turn into “profiteering”?
Tags:charity, Conflict of Interest, corporate giving, Fundraising, International, Mission, nonprofit, Nonprofit management, nonprofits, not for profit, philanthrocapitalism, Poverty, Relations with funders, social entrepreneurship
Posted in Charity scandals, Conflict of Interest, Coverage of nonprofits, Current Affairs, Earned income, Finances, Fundraising, International, Investment, Mission, Nonprofit management, Nonprofits--General, Poverty, Relations with funders, Social enterprise | Leave a Comment »
November 17, 2010
A new study—poignantly titled “Social Enterprise: Innovation or Mission Distraction?”—reports that nonprofit agencies which choose to support themselves with for-profit businesses end up serving their clients less and worse. Moreover, when the businesses thrive the profits go back into the business, while when the businesses falter the losses are taken out of the hide of the agencies. (So glad to see nonprofits acting like businesses! This “heads I win, tails you lose” approach is just what the investment bankers did—en route to destroying the economy.)
Gloating is unattractive, and unwarranted. After all, any friend of the nonprofit sector would be delighted to learn there was a way to strengthen it without having to stretch every penny into a copper wire, or grovel to wealthy people who understand the situation less well than the people they may or may not deign to help. But a bit of schadenfreude directed at the prophets of social enterprise really can’t be avoided.
It’s always seemed obvious to the Nonprofiteer that if there were money to be made in ending poverty, poverty would long since have been ended. The challenge is to provide services and alleviate suffering when it isn’t profitable. It seems equally obvious that any system which must allow for a private person to make money before the clients get served is one that reduces the resources available for those clients.
Now, lots of things that are obvious also happen to be false. And certainly there’s a reasonable discussion to be had about whether, once you factor in all the costs of raising donations, it would be cheaper or more efficient—even with a profit margin—to organize charities as business enterprises. But a decade’s worth of experimentation suggests that the answer is “No.”
Are services provided by social entrepreneurs better than no services at all? Sure, but it demonstrates the poverty of our current mindless anti-tax political discourse that those seem like the only two choices. The real alternative to entrusting the provision of public services to for-profit groups is having them supplied by the public. Anyone familiar with the history of the private subway franchises and private lending libraries and private schools of the 19th Century will be grateful that our predecessors decided to eliminate the middleman markup and run subways and libraries and schools as the public goods they are.
Have social enterprises ever succeeded? Certainly, and more power to them. But anyone who claims they will supplant philanthropy, charity or social change movements is selling snake-oil.
The most thoroughgoing enthusiasts of the market seem to forget that Adam Smith himself recognized areas in which it would, and did, fail. Those of us caring for people who can’t make profits for other people are dealing with the consequences of those failures. So let’s face it: we’re outside the market economy. Let’s stop contorting ourselves to fit into it, and concentrate on figuring out how to make our own systems function more fairly, transparently and effectively.
Tags:501c3, Fundraising, Mission, nonprofit, Nonprofit management, nonprofits, not for profit, philanthrocapitalism, philanthropy, Poverty, Private Philanthropy, recession, social capital, social enterprise, social entrepreneurs, social entrepreneurship, social services
Posted in Coverage of nonprofits, Current Affairs, Earned income, Fundraising, Investment, Mission, Nonprofit management, Nonprofits--General, Poverty, Private Philanthropy, Social enterprise | 10 Comments »
August 31, 2010
Jane Mayer’s excellent piece in this past week’s New Yorker about the brothers Koch, oil billionaires who’ve donated hundreds of millions to nonprofits promoting right-wing causes, finally clarified for the Nonprofiteer her unease at Bill Gates’s campaign to persuade billionaires to donate half their estates to charity. It’s not a question of who has or hasn’t taken the pledge, though that’s an entertaining parlor game. Nor is it the fact that the generosity of extremely wealthy people may not be what the rest of us have in mind when we hear the word “charity.” (The Kochs’ “charity,” for instance, is a term of art encompassing donations to all kinds of institutions, predominantly think-tanks churning out rationales for the economic interests of wealthy people and front groups to make it appear that defending those economic interests is the political will of the non-wealthy majority.)
What’s troubling about the billionaires’ pledge remains so even when the receiving causes are unexceptionable. Gates, for instance, has very generously underwritten substantial efforts by the Global Fund to Fight AIDS, Tuberculosis and Malaria. Good for him, and for the world.
But.
Even the best-intentioned best-directed private donations are a way for moneyed people to work their will on the public, while the rest of us have nothing but the vote. And when the level of contributions is discussed in fractions of $1B, it’s no longer charity within a democracy: it’s benevolent dictatorship.
Maybe our country should be giving less to treat AIDS et al and more to eradicate infant and maternal mortality through the UN Population Fund; maybe not. That’s a decision to be made by the people of the United States, through our government. It’s really not a decision for a single person.
Why not? Well, for starters, the “single person” in question is a billionaire, and thus always a man. That means almost by definition that the highest levels of charitable giving will overlook women, though we constitute more than a majority of the population. And if that’s the case—if society’s needs are met by individual whim instead of collective decisions about the greatest good for the greatest number—then what, actually, is left of self-government?
Of course, billionaires have plenty of assistance in the task of allowing economic power to trump political will. The Supreme Court’s decision in Citizens United, holding that corporations are “persons” with First Amendment rights violated by limits on their campaign spending, already put the nation quite a way down that road. But somehow it’s worse when something that sounds so benign—”half my estate to charity, because I’ve been so fortunate”—actually translates as “I set the agenda for the future of this country, because I’ve been so fortunate.”
What we really want from billionaires is for them to pay a lot more in income taxes: say, the 87% of taxable income paid in 1954, or even the 70% paid at the start of the 1980s. And then we as a group can decide where our group’s money goes. All contribute, all decide.
And what we really want from billionaires’ heirs is for them to pay the 77% estate tax rate in effect in 1941, or even the 70% estate tax rate in effect in 1976. (And let’s not hear any nonsense about “death taxes.” The dead aren’t the ones paying.) Why shouldn’t people who get money by inheritance have to pay taxes on it, just like people who get it by working?
Merely to ask that question is to answer it: no democratic society decides that people who don’t work should be privileged over those who do. Societies like that are called “aristocracies,” and all those so-called Constitutional Originalists running around hijacking elections by screaming about excessive taxation should take a moment to remember that our Constitution was designed precisely to interfere with the establishment of a government by inheritance.
The Constitution prohibits not once but twice the granting of any title of nobility; but the Framers didn’t rest there. They fought to cripple and ultimately abolish entail and primogeniture, the primary devices by which English law kept family fortunes together. Why? Because they realized that, if you’re founding a republic, it’s really not a good idea to let money keep piling up generation after generation in the same few pairs of hands.
Self-governing societies can’t operate on noblesse oblige, and societies that do aren’t truly self-governing. As Dr. Franklin said, “A republic—if you can keep it.”
Tags:501c3, Advocacy, charity, corporate giving, donors, Environmental, foundations, Fundraising, governance, International, IRS, Mission, nonprofit, Nonprofit management, nonprofits, not for profit, philanthrocapitalism, philanthropy, politics, Private Philanthropy, Relations with funders, women, Women's Issues
Posted in Advocacy, Advocacy groups, Campaign finance, corporate giving, Coverage of nonprofits, Current Affairs, Disease charities, Environmental, Finances, Fundraising, International, Mission, Nonprofit management, Nonprofits--General, Philanthropy and Taxation, Private Philanthropy, Public private partnerships, Women's Issues | 10 Comments »
July 28, 2010
Dear Nonprofiteer:
What rules govern the websites that provide a free useful service to people but also have a PayPal “donate” button on their page to keep the service free?
If that person’s PayPal is linked up to it, does that not mean that the donations (if any) cannot exceed the IRS annual exclusion amount of $13,000? Or should that person try to register the Website as a non-profit?
Signed, Prepared to Pony Up But Puzzled
Dear Puzzled:
The Nonprofiteer was completely stymied by the legal and technical nature of your question. Fortunately, she has a colleague in the Association of Consultants to Nonprofits whose knowledge of nonprofit law is encyclopedic. Attorney Kathryn Vanden Berk kindly provided the following responses to your questions:
At first blush, I assumed that the Websites are 501(c)(3) entities, and that the advice is offered without charge — with the “ask” being a free-will tax-deductible donation.
However, I wonder if you’re talking about a for-profit entity that is asking for a free-will non-deductible “donation” in lieu of a charge.
In the first instance, there is no prohibition against an exempt organization (EO) giving advice or asking for donations. It can even charge for the advice, as when Lumity requires payment for the book I wrote about how to start nonprofits in Illinois. If it is asking for a free-will donation so that the service will remain free, then anyone can make up their own mind as to whether or not they want to click on the donate button. I used to use the Cornell University Law School LII (Legal Information Institute) to get into the IRS Code. It would often put up a screen asking for donations for the site’s upkeep. I just returned to their website and found that they still ask for donations. You can see this at http://nimbus.law.cornell.edu/civicrm/civicrm/contribute/transact?id=6
In the second instance, a person may request a “donation” so long as they don’t hold themselves out to be a 501 (c)(3) charity, and/or claim that the “donation” is tax-deductible. This might be a good way for some enterprising law firm to throw things out on the web to see if anyone finds it to be sufficiently useful that they are compelled by guilt (or appreciation or whatever) to pay for it.
If that person’s PayPal is linked up to it, does that not mean that the donations (if any) cannot exceed the IRS annual exclusion amount of $13,000? Or should that person try to register the Website as a non-profit?
I’m not sure what you mean by this. The annual excludable amount for charitable contributions is related to one’s income, not to any arbitrary number. Can you be more specific? Are you talking about standard deductions?
The Nonprofiteer wonders whether the $13,000 cited by Puzzled refers to the limit on tax-free gifts to individuals. If so, then yes, gifts to a personal PayPal account must be counted toward that total. If not, she urges Puzzled to clarify her question in the comments section below.
Whatever the circumstances, there’s no option simply to “register the Website as a nonprofit,” unless it actually IS a nonprofit, meaning an agency with a public purpose governed by a Board of Directors. As in the case of “What about gifts to individuals?”, the Nonprofiteer stresses that nonprofit status is not camouflage for other economic arrangements; it’s an actual status requiring service to the community.
Many thanks to Ms. Vanden Berk for her expertise. Input on these technical questions from other lawyers and IRS specialists gladly accepted!
Tags:501c3, charity, donors, Fundraising, gifts, Management Advice Day tip, Marketing, nonprofit, Nonprofit management, nonprofits, not for profit, philanthrocapitalism, philanthropy, Private Philanthropy, tax deductible, tax exempt
Posted in Earned income, Finances, Fundraising, Nonprofit management, Nonprofits--General, Philanthropy and Taxation, Private Philanthropy, Technology | 3 Comments »
March 4, 2009
A group of Rice University MBA students is spending spring break in Rwanda, hoping to use their skills to come up with a distribution system for a trio of products developed through the university’s global health initiative: a low-cost neonatal incubator, a diagnostic lab-in-a-backpack and a plastic dosing device for liquid medicines.
“All of these products are terrific designs, but you cannot solve pervasive health problems with one or two of these,” [the supervising professor] said. “You need them by the hundreds and thousands, and you need to overcome the problem of distribution, which has stymied Western governments and aid organizations for decades.”
[CLIP]
“Neither governments nor aid organizations have been effective at getting products to the people who really need them,” [the professor] said. “But that’s what business does best. Products get delivered and customers get served when there is a profit motive.”
The Nonprofiteer doesn’t wish to be cynical, and she really doesn’t want to devalue the obvious effort Rice University has put into making its students aware of the outside world. But the notion that a group of MBA students can solve problems that have “stymied . . . governments and aid organizations for decades,” just because they’re interested in making money and those earlier groups were not, makes her want to hurl.
This is arrant nonsense, market-worshiping of the most thoughtless type. It is NOT true that the profit motive is best at assuring distribution of necessities to poor people; the profit motive, and the free-market capitalism in which it’s embedded, are best at assuring distribution of items to people who can pay for them.
We in the nonprofit/NGO sector are happy to welcome any allies to our fight, but please don’t insult our intelligence, experience and expertise by suggesting that the obstacles we face will melt away magically with the application of a little well-placed self-interest.
If the days of Gordon Gekko and “Greed is good” aren’t over yet, with the world financial system circling the drain in a crisis created by people who believed the profit motive could solve all problems, the Nonprofiteer wonders what will be necessary to drive a stake through its heart.
Or, more succinctly: puh-LEASE.
Tags:Health care, International, Nonprofit management, philanthrocapitalism, Poverty
Posted in Disease charities, Health care, International, Nonprofit management, Nonprofits--General, Poverty | 3 Comments »
May 23, 2008
If you haven’t read Just Another Emperor, Michael Edwards’ anatomy [and debunking] of philanthrocapitalism/social venture philanthropy, do. It. Now.
Tags:Advocacy, charity, nonprofit, not for profit, philanthrocapitalism, philanthropy, Private Philanthropy, social venture
Posted in Advocacy, Foundation Hall of Shame/Stupid Foundation Tricks, Investment, Philanthropy and Taxation, Private Philanthropy, Public private partnerships | 1 Comment »
