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:501c3, Advocacy, Board of Directors, Boards of Directors, charity, governance, Marketing, Mission, nonprofit, Nonprofit management, nonprofits, not for profit, philanthrocapitalism, philanthropy, Poverty, Private Philanthropy, social entrepreneurship, volunteer
Posted in Advocacy, Boards of Directors, Coverage of nonprofits, Current Affairs, Earned income, Finances, Marketing, Mission, Nonprofit management, Nonprofits--General, Philanthropy and Taxation, Poverty, Private Philanthropy, Social enterprise, Technology, Volunteers/Volunteerism | 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 »
April 7, 2009
In the midst of a thoughtful discussion at the Wagner Center of the competing demands on philanthropies for funding of overtaxed social services and of social-change advocacy, big news: the White House is about to announce creation of the long-proposed Office of Social Innovation to bring together government responses and resources to the concerns of the philanthropic and charitable sectors.
Bureaucratic-style confirmation: the office appears on the list at whitehouse.gov. Speculation about possible leadership has begun.
Tags:Advocacy, charity, Endowment, Mission, nonprofit, Nonprofit management, not for profit, Office of Social Innovation, philanthropy, Private Philanthropy, social entrepreneurship, Social Innovation, Wagner Center, White House
Posted in Advocacy, Advocacy groups, Current Affairs, Endowment, Foundation Hall of Shame/Stupid Foundation Tricks, Mission, Nonprofit management, Nonprofits--General, Private Philanthropy, Public private partnerships, Social Service Agencies | 2 Comments »
January 16, 2009
Interesting concept: First Slice describes itself as a “self-funding charity,” a subscription catering business whose paying customers are also subsidizing catered meals for poor people. Query whether a business delivering gourmet meals to homes three times a week will be able to thrive in an economic downturn, but we salute the mix of ideas driving the project: training poor people in food preparation and employing them in the catering kitchen; bringing together beneficiary-clients and subscribers as co-volunteers in meal preparation; and soliciting contributions while also assuring a stream of earned income.
Of course, anything about food appeals to the Nonprofiteer. Maybe First Slice will take on her pet idea of “Half a Loaf,” a benefit event offering tiny portions to attendees so restaurants can offer meals to those who need them.
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*Woodstock emcee, August 1969
Tags:catering, Mission, Poverty, Relations with funders, self-funding charity, social entrepreneurship
Posted in Earned income, Mission, Poverty, Relations with funders, Social Service Agencies, Volunteers/Volunteerism | 4 Comments »
July 1, 2008
Here’s the latest idea for “sustainable” funding for AIDS services in Africa: a subscription music service whose proceeds will be divided between music producers and AIDS charities. Presumably the notion is that people who are downloading music for free instead of buying it will think twice about stealing from African AIDS victims. Still, the Nonprofiteer wonders how this is more “sustainable” than encouraging regular contributions by regular people to UNICEF or CARE or any of the AIDS research charities.
At the risk of redundancy, she’ll say it again: if there were money to be made from curing poverty and disease and inequality, they would already be cured. Let’s stop appealing to people’s cupidity and try appealing to their sense of justice instead.
Tags:(RED), AIDS, charity, Fundraising, Health care, International, Marketing, nonprofit, not for profit, philanthropy, Poverty, Private Philanthropy, Relations with funders, social entrepreneurship, social venture
Posted in Disease charities, Earned income, Fundraising, Health care, International, Marketing, Poverty, Private Philanthropy, Relations with funders, Social Service Agencies, Uncategorized | Leave a Comment »
