Social entrepreneurship is a growing trend that benefits both companies and customers. Corporate responsibility is on customer’s minds, especially younger generations. In this article, we’ll delve deeper into what social entrepreneurship is and how it’s different from traditional nonprofit fundraising. We’ll also share how nonprofits can benefit from social entrepreneurs and provide a few examples.
Social entrepreneurship started in the 1980s as a way for corporations to attract more customers. More people than ever are focused on corporate responsibility, and businesses have noticed. Hence, social entrepreneurs take social responsibility to the next level by creating an organization with the primary goal of addressing a cause or community need.
In this article, we’ll discuss what social entrepreneurship is and how it differs from most nonprofit organizations. We’ll also share how nonprofits can benefit from social entrepreneurs and give you 3 examples of social entrepreneurs that have made a significant difference while gaining personal recognition.
Social Enterprise vs Nonprofit: Key Differences Explained
Social enterprise and nonprofit are two models often used to pursue social good. But what exactly is the difference between a social enterprise and a nonprofit organization? With so much overlap, it can get confusing
In this comprehensive guide we’ll break down the key distinctions to help you understand when each structure makes sense.
Defining Social Enterprise vs Nonprofit
First, let’s clearly define what we mean by social enterprise and nonprofit:
Social Enterprise: An organization that uses business strategies and earned revenue to pursue a social mission. It can be structured as either a nonprofit or for-profit entity. The focus is on innovating and becoming financially self-sustaining to maximize social impact.
Nonprofit: A tax-exempt organization that operates to further a social cause or provide a public benefit. Nonprofits rely heavily on charitable donations and grants. Any profit made gets reinvested back into the mission.
On the surface, they sound similar in pursuing social good. But there are some meaningful differences in how they operate, generate revenue, and prioritize purpose vs. profit.
Key Differences Between Social Enterprises and Nonprofits
Here are some of the main distinctions
Revenue Sources
Nonprofits: Rely primarily on charitable donations and grants. The bulk of their funding comes from individuals, foundations, corporations, and government sources. Any revenue generated from the mission (e.g. ticket sales for a museum) is secondary.
Social Enterprises: Earn a substantial portion of revenue from business activities and the sale of products/services. Their goal is to become financially self-sustaining rather than dependent on outside funding.
Profit Orientation
Nonprofits: Are explicitly non-commercial. They cannot distribute profits to leaders or third parties. Any surplus gets reinvested into the mission.
Social Enterprises: Can be nonprofits that generate some earned revenue. But they can also be for-profits that blend making money with social impact. Profits may be shared with owners/investors.
Legal Structure
Nonprofits: Are formed as 501(c)(3) public charities, private foundations, or other tax-exempt structures like associations or cooperatives. This provides tax advantages but limits revenue sources and political activities.
Social Enterprises: Can be structured either as nonprofits or for-profits like LLCs, partnerships, and corporations. The for-profit legal structure provides more flexibility to raise capital and share profits.
Mission Focus
Nonprofits: Exist to further their social mission. If the mission and profit-making activity conflict, nonprofits are legally obligated to prioritize the mission.
Social Enterprises: Tend to highlight their social mission and impact. But for-profit social enterprises are ultimately accountable to owners/shareholders who may steer strategy based on profitability.
Oversight
Nonprofits: Must comply with rules and regulations governing tax-exempt organizations in their jurisdiction. This ensures transparency and that funds are properly used to benefit the public.
Social Enterprises: Nonprofit social enterprises follow oversight regulations. For-profit social enterprises have more flexibility in their operations and profit allocation with less oversight.
When a Nonprofit Structure Makes Sense
These factors favor creating a nonprofit over a social enterprise:
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You need tax-deductible donations from individuals and grants from foundations/government.
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You want to instill public trust by complying with nonprofit oversight and regulations.
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Your social programs require subsidization and cannot sustain themselves on revenue.
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You want legal accountability to prioritize your mission over profits.
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You aim to retain any surplus funds in the organization rather than distributing to owners.
When a Social Enterprise Model Makes Sense
These situations lend themselves to a social enterprise approach:
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Your programs can generate substantial earned revenue to cover costs.
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You want freedom and flexibility to pursue diverse funding sources.
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You need to offer investment returns to attract the level of capital required.
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You want to build scalable solutions that disrupt the status quo of an issue area.
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Your mission solutions have clear paths to commercialization and profitability.
Examples Comparing Social Enterprise vs Nonprofit
To illustrate the differences in action, let’s compare a few organizations from both models:
Nonprofit Organization: Salvation Army
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Mission: Provide social services like food, shelter, rehabilitation, and thrift stores to support those in need.
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Legal Structure: 501(c)(3) nonprofit in the U.S.
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Primary Funding: Donations from the public.
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Surplus Handling: Retained and reinvested into programs serving the mission.
This is a traditional charity focused on addressing social issues through programs funded via philanthropic donations. As a nonprofit, it cannot distribute profits externally.
Social Enterprise: Toms Shoes
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Mission: Provide shoes, eyewear and other products to people in need.
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Legal Structure: For-profit LLC.
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Primary Funding: Sales revenue. Donates one product for each one sold.
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Surplus Handling: Profits can be distributed to owners and shareholders.
Toms founder Blake Mycoskie pioneered the One for One model where each product purchased triggers a donation to someone in need. As a for-profit company, Toms has no prohibition on distributing profits.
Hybrid Model: Goodwill Industries
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Mission: Provide job training, employment, and other community services.
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Legal Structure: Network of independent 501(c)(3) nonprofits.
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Primary Funding: Sales from retail thrift stores.
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Surplus Handling: Profits must be reinvested locally into community programs.
Goodwill leverages its chain of thrift stores to fund employment programs for different populations. As nonprofits, Goodwill locations cannot distribute profits externally. Surplus gets reinvested locally.
Key Takeaways on Social Enterprise vs. Nonprofit
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Social enterprises and nonprofits both pursue social missions but use different strategies and legal structures.
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Nonprofits rely on donations and grants with any surplus reinvested. Social enterprises aim to generate revenue from business activities.
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Nonprofits must follow regulations on their operations and cannot distribute profits. Social enterprises have fewer restrictions, especially when structured as for-profits.
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Nonprofit status makes sense when donations/grants are needed. Social enterprise models allow more flexibility to commercialize solutions.
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Hybrid approaches also exist, like nonprofits that create social enterprises as subsidiaries to raise funds.
The social enterprise and nonprofit models both have their advantages. Evaluate your specific mission, programs, and funding needs to determine which approach (or combination) best fits your social aims.
Nonprofit social entrepreneur
Nonprofit social entrepreneurs focus on the organization’s social, not financial, impact. In this case, social entrepreneurs start nonprofits organization to answer a need in their community or a larger cause.
Instead of making significant amounts with their organization, they’ll reinvest the profits into the business to ensure its long-term success.
These organizations have a better chance of success than most since they have more funding. These organizations often grow into larger nonprofits with greater name recognition.
What is Social Entrepreneurship?
Social entrepreneurship is based on an on-profit business model, which is started to address social issues. It’s a growing trend that has gained traction thanks to a new focus on corporate responsibility.
While profit is a goal, it isn’t the organization’s primary purpose.
There are 4 types of social entrepreneurship.
Should You Start A Nonprofit or a Social Enterprise?
FAQ
What are the disadvantages of a social enterprise?
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Pros
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Cons
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Making a social impact
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Limit on revenue generation
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Chances of receiving grants
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Competition with corporates
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Employment opportunities
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Strict rules and regulations
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Tax deductions
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Constant monitoring
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What is the difference between a non-profit and a social enterprise?
The fundamental difference between non-profits and social enterprises is the source of funding. Non-profits rely on public funding through donations. Social enterprises are businesses; they generate their own profit to keep themselves running. The main essential difference between non-profits and social enterprises is where they get their money.
Do social enterprises make money?
Though social enterprises generate revenue, all profits go back into the business. So, while they do create a profit, they operate like a non-profit by directing all funds towards the social, economic, or environmental cause. It is also possible for non-profits to operate social entrepreneurial initiatives, like the Girl Scouts or Goodwill.
Do social enterprises do good?
When thinking of charities or organizations whose aims are to “do good” we often think of nonprofit organizations. However, social enterprises, which can operate as for-profit or through a hybrid of not-for-profit and for-profit financing structures, are a growing branch of organizations seeking to do good in their communities.
What does a social enterprise do?
Niko Malkovich: In general, a social enterprise uses some sort of earned revenue to address a social need rather than relying solely on grants and fundraising like traditional nonprofits do. It might sell a product for a profit or it might raise money for a social venture by giving investors a return.
