Social Enterprise Ideas Require the Right Foundation

For nonprofits contemplating a social enterprise, a fundamental first hurdle will be selecting the form that the enterprise will take. There are several different options available, and the best fit for the organization will depend on a variety of factors.

Operational Division. A nonprofit can operate a new social enterprise as part of its ongoing operations. This can be done directly, or through a single-member LLC that can help segregate risk for the nonprofit. The single-member LLC generally will be considered a disregarded entity for federal tax purposes, which means that the social enterprise activity will be reported on the nonprofit’s Form 990. This type of structure would be appropriate for social enterprise ideas that are clearly charitable and in furtherance of the nonprofit’s exempt purposes. However, it also can work for activities that may not be substantially related, and taxable under the unrelated business income taxation rules—so long as the activity is not a substantial part of the nonprofit’s overall operations.

Nonprofit/For-profit Combination. A nonprofit also can operate a social enterprise through a separate entity that will not be disregarded for tax purposes. This can take a variety of forms, including a parent/subsidiary structure, a brother/sister structure, and a joint venture. This type of arrangement is more appropriate for organizations considering a social enterprise idea that may fall outside of 501(c)(3) activities or purposes, and that will be conducted on a substantial basis. Check out this earlier blog post for more detailed information about options for combination structures.

Key Considerations. In evaluating structure, there are several important issues that are important to hash out. For example,

  • Who will the funders be? Is a charitable deduction needed, or will funders prefer to have “a piece of the pie”?
  • Could the social enterprise fit under a 501(c)(3) umbrella?
  • Will there be transactions between the nonprofit and related parties?
  • Is the nature of the social enterprise activity largely commercial?
  • Is it feasible for the nonprofit to operate with a separate entity, and keep the two entities truly separate?

Implementing a new social enterprise is exciting for a nonprofit, but it carries some risk. It’s important for nonprofits to fully evaluate the idea and make informed decisions. Check out some of our prior social enterprise blog posts for more information.

Karen Leaffer Schauble and Becky Seidel will be participating in a legal topic panel discussion as part of the 2015 Social Enterprise Exchange Cohort. The cohort is created to support nonprofits in understanding, developing and capitalizing social ventures. This is the second year they’ve participated. Check out this resource prepared for the panel: 2015 Cohort.

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