Social Enterprise or Nonprofit? What’s the Difference?

Have you heard the terms social enterprise and nonprofit organization used interchangeably? Very likely, but perhaps you have not paid much attention to the differences until now. First things first, this is probably not the biggest puzzle you need to solve as you set out to make impact in the world. But haven’t you been curious about the differences between them? Are nonprofit organizations also social enterprises by default? Are all social enterprises also nonprofit organizations? And are they still called nongovernmental organizations (NGOs), or are those different entities altogether?

What is a nonprofit?

The term nonprofit often brings up images of a small organization run by a tiny group of well-intentioned volunteers. You may imagine them trying to address a social ill or deliver services to people in need. Many people think of NGOs as having insufficient resources compared to their huge ambitions. Also, we tend to perceive that they are not very focused on a bottom line and they are flexible in their operational strategy. On the flipside, a social enterprise might be considered more like a business, only with a social interest as its primary purpose. In reality, the lines are a little blurred. You might not be surprised to learn that there isn’t much consensus about the descriptions. That said, there are general guiding principles for understanding this sector.

Firstly, what are NGOs? They are essentially organizations that are not run by governments. This means that they do not get their mandates from any government. It also means that they may be exempted from paying corporate taxes in their host country. That second part is the key difference between businesses and NGOs — because they perform a social service, most governments are willing to forfeit tax revenue from them. So in some way, governments are funding NGOs, right? Many people are uncomfortable with the term NGO because it describes an organization by what it isn’t, rather than what it is. Certainly a dog will not like to be called a non-cat, but that’s exactly the situation here.

Can nonprofits earn profit?

So how about that concept that nonprofits do not earn profit, because isn’t that what the name implies? Sounds logical, right? Not quite. Basically, profit refers to the difference between revenue and expenditure. Regardless of their title, any well-run venture should aim to earn more than it spends, so how does the nonprofit description apply? It is basically about the how the the venture uses excess revenue. In a business, the shareholders receive dividends from excess revenue (profit), but a nonprofit, spends its excess (if any) on operations.

This also does not mean that staff members should not be paid for their work. While salary scales might be more lower in the nonprofit sector, many nonprofit CEOs earn salaries like their peers in the corporate sector. What about senior staff members who have performance bonuses written into their contracts? The key difference is that In a nonprofit, the Board of Directors (or Trustees) serve as volunteers. This means that they do not get paid for their services, while the reverse is the case in a business.

What is a social enterprise?

But what about social enterprises, did I hear you say? There are various definitions, but the description from Social Enterprise Alliance is particularly attractive. According to them, “a social enterprise is an organization that addresses a basic unmet need or solves a social or environmental problem through a market-driven approach”. In essence, a social enterprise is less of a charity and more of a business established for a social purpose. So if you have set out to reduce homelessness by building shelters, you may describe your venture as a nonprofit. But if your approach is to teach homeless people valuable skills, help them find work, split the earnings with them and invest the rest into running a training facility, you may describe your venture as a social enterprise.

Because there are so many types of social enterprises, you should keep an open mind in defining yours. If you are entirely or mostly dependent on donor funds for your operation, perhaps you are not operating a social enterprise. However, if you are developing solutions to social needs and earning from those solutions, then you are managing a social enterprise. For example, Social Entrepreneur Alliance lists three categories of enterprise models. Firstly, Opportunity Employment — organizations that employ people who have significant barriers to mainstream employment. Secondly, Transformative Products and Services — organizations that create social or environmental impact through innovative products and services. Thirdly, Donate Back — organizations that contribute a portion of their profits to nonprofits that address basic unmet needs.

So what kind of venture are you managing?

As you can see, there is no one-size-fits all approach to defining an organization. With the right name, you may decide to describe your stakeholders as clients or beneficiaries. You may also decide whether you spend more time courting donors or developing products. At the end of the day, what matters above all else is that you are doing good in the world. Obviously, it is also key that you play by the rules, and measure your impact. As long as you are doing good work, everything else will take care of itself.

By the way, are you sure that you are getting the most out of your venture? Through FrameWork, we work with leaders of high potential ventures to optimize their strategy and operations. Get in touch today.

Originally published at https://thinktank.one on September 23, 2020.