It always seemed so simple! You either had ‘nonprofits’ (501c(3)) - charitable organizations that were focused on the mission and ‘doing good’. Or…you had ‘for-profit’ businesses whose sole purpose were to maximize profits for owners and stakeholders. There was no middle ground whereby organizations could both generate revenue and do social good.
The traditional charitable organizations could pictorially be displayed as two distinct ‘silos’ like this:
Traditional Organizational Structure: Charity and Business
“Pure” Charitable 501c3 Organization with funding 100% from donations & grants
The typical inference of a ‘charitable’ organization has morphed into the tax status of the organization (501c3)). This is how most people have come to think of a ‘do-social-good’ organization. We think of our traditional nonprofit that is funded strictly via grants and individual donations. There is little funding diversification and there are no revenues from additional sources such as sponsorships, fees or earned income. It is important to note that this ‘pure’ type of nonprofit is less common as charities seek to expand their funding sources.
Business with the mission to maximize profits
The common perception of a for-profit business is that they are 100% focused on profit maximization. In this context, these are publicly held corporations with stakeholders. These companies have the legal obligation to maximize stakeholder value. A publicly held corporation that is 100% focused on profits serves social good by providing a product or service in demand. Hence, it serves their customers and provides jobs for their employees.
But times have changed!
These days, if an individual wants to make a difference, give back, or support a cause, there are many organizations that do social good and generate revenue. In today’s world, we do not give much thought as to how organizations obtain their financial funding or how they serve their community. Many organizations in our hometown are not just traditional ‘nonprofit’ or ‘for-profit’ - they are a blend of the two.
Below is a linear diagram that depicts the various types of organizations - including some new legal entity organizations. The diagram ranges from 100% ‘pure’ nonprofit on the left (#1) to 100% profit-focused business on the right (#5).
Today’s “Do-Social-Good” Organizations
Priority on mission, then revenues
Priority on profit, then social mission
Today’s Wide Range of “Doing Good” Organizations
From the above diagram, there are two new legislated types of ‘do-good’ organizations between the traditional 501c3 nonprofit (#1) and the for-profit business (#5). Today’s charitable entities - those businesses doing social good - are varied. These entities may incorporate a blend of traditional nonprofit and for-profit businesses.
To simplify, below is a short list of the types of firms that have a ‘double-bottom’ line focus; a dual mission to generate revenue and do social good.
- Benefit Corporation: There are different types of Benefit Corporations that are determined by each state’s legislature (not all states have Benefit Corporations but they should!). These Benefit Corporations serve a dual bottom line. Currently, 34 states have passed Benefit Corporation legislation (click here for a state-by-state status). Benefit Corporations serve both to generate revenue and serve a specific social cause. To learn more about Benefit Corporations, click here.
- Low Profit Limited Liability (“L3C”) Company: The Low-Profit Limited Liability Company is also a state legislated for-profit business entity. It is the traditional Limited Liability Company format that encompasses a social mission as part of it’s charter. It is a type of social enterprise that has a double bottom line mission to make a profit and do social good. According to the Americans for Community Development legislation has been passed in eight states with legislation pending in 27 other states.
- The Hybrids: It is important to recognize that a ‘double bottom line’ firm does not have to be a specific legal entity. The hybrid may be a legal nonprofit (501c3) organization that generates revenues as some percentage of total funding or, they may be a business that generates profits as well as serve a cause or the community for social good. The blend of mission vs. revenue generation can vary.
- Nonprofit Hybrid Examples: A typical example is a university who received federal and state funding (grants) but also generates fees in the form of college tuition. Another example we are all familiar with is Goodwill. Goodwill turns around and sells their donated goods in their stores, thus generating revenues and providing jobs for their employees.
- For-Profit Hybrid Example: A typical example would be a hometown, privately owned business or professional that serves his clients or customers and also gives back to the community with in-kind donations of goods or services, sponsorships, or provides other financial support.
In summary, today’s charitable organization landscape has changed and continues to evolve. Most legal entities including the newer Benefit Corporations and Low-Profit Limited Liability Companies have a blended approach to both doing social good and generating financial revenue. Understanding an organization’s legal structure - as a nonprofit or for-profit business - requires a detailed look and clear understanding of how the company blends the dual missions.