Clouded by
ambiguous legal structures and funding models, the world of social
entrepreneurship floats in limbo between for-profit businesses and socially
conscious nonprofit organizations. The conflict created by this predicament
remains unresolved and burdensome.
In 2007,
Bill Gates delivered a Harvard University commencement speech challenging
graduates to devise “a more creative capitalism [to] stretch the reach of
market forces so that more people can make a profit, or at least make a living
serving people who are suffering from the worst inequities.” Opportunities
exist to solve the complicated relationship between business and social
endeavors, yet some proposed solutions provide a better outcome than others.
Ambiguous Frameworks
Vermont
was the first state to enact legislation to bridge business and social impact
investing. Michigan followed suit in 2009 by building legal framework for
social enterprises – becoming one of nine states with L3C legislation. Low-profit
limited liability companies (L3Cs) are an appealing business entity because it
offers legal and tax flexibility traditionally found in the LLC structures. In
addition, it allows the entity to pursue foundation investment funds.
Unfortunately,
the model’s framework is ambiguous because hybrid business entities with no intent
to have a social impact can be created.
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L3C Pros
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L3C Cons
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Legal
and tax flexibility similar to LLCs
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Tax
classification as an LLC versus a 501(c)3
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Ability
to have revenue generated cash flow
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Annual
revenue cap
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Ability
to pursue foundation investment funds
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Conflicting
interests between social good and business objectives
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Lack of Scalability
The Stanford Social Innovation Review (SSIR)
chastises two additional hybrid funding models based on lack of scalability.
The first model involves a nonprofit receiving support by a separate
income-generating venture that has a separate and distinct core mission from
the nonprofit. The second model is based on a B2B or consumer-direct,
fee-for-service model that does not rely heavily on fundraising or government
support. Both models create a hybrid cash flow scenario, but it is difficult to
grow. In a 30 year SSIR study on 144
nonprofits that grew to $50 million or more per year, none of the organizations
represented functioned using these hybrid models thus confirming SSIR’s criticism.
Successful Hybrids
A third
hybrid model, proposed by Inc.
magazine, merges a nonprofit and a for-profit business with a unified mission.
For example, subsidiary Mozilla Corporation “donated” $200,000 to its parent
company, Mozilla Foundation, in 2011. As Mozilla Corporation grows, Mozilla
Foundation also grows which provides a sustainable scaling relationship.
Issie
Lapwosky, contributor for Inc. magazine,
offers three factors to defend the importance of scalability for this effective
hybrid model.
1.
The nonprofit’s unrelated business
income threatens its nonprofit status
2.
The for-profit needs help managing
its philanthropy
3.
Each entity needs something offered
by the other
This
symbiotic relationship expressed by a hybrid, nonprofit, revenue-generating
model paves new paths for the modern social venture.
Combining
the black and white for-profit and nonprofit worlds rely on the ability to
develop a new language for social entrepreneurs who exist in the grey area. The
conflict of customers versus beneficiaries continues to disrupt communication,
blur the effectiveness of structural frameworks, and provide scalable solutions
that combine the two worlds.
