The Revolutionary Potential of Social Enterprise

Over the past forty years, we’ve become accustomed to the legal, economic, organizational, and moral distinctions between for profit and non-profit enterprises.  For-profits, like McDonald’s and Proctor and Gamble, provide goods and services in exchange for money which then gets distributed to workers, owners, investors, and the like.  Non-profits, like Feeding America or the Salvation Army, provide free or nominally priced services to those who likely could not afford them otherwise.  Their income is through the generosity of individuals, philanthropists, and governments/taxpayers and spent to pay employees and subsidize these services’ cost to clients.  Money left over may be socked away for a rainy day or invested into expansion.  There are no investors or shareholders in the for-profit sense (nonprofits still take out bank loans and other lines of interest-bearing credit).  This institutionalized distinction between for-profit and nonprofit, I believe, is becoming incoherent and social enterprise demonstrates the revolutionary potential.

First, a hypothetical.  What if McDonald’s wanted to become a nonprofit, what would it take?  Under the IRS definition of a 501(c)(3) it would need to be operated for an exempt purpose whose income does not “inure” to controlling individuals or shareholders.  I may be wrong, but a $1 McDouble seems like a charitable price for feeding those in poverty.  The key difference I believe is the “inuring” of profit.  So, McDonald’s could re-privatize its ownership, change certain lines of investment capital, rework its executive benefits and viola! (I ignore the political limits because they are less relevant to my point here).  In fact, Panera Bread now has a self-sustaining nonprofit arm integrated with its restaurants.

What social enterprise has demonstrated is that you don’t have to give away things for free to be a nonprofit.  This is an inversion of what business students say – “You can do well and do good.”  This is the revolutionary potential of social enterprise.  Many for-profit business could qualify as charitable.  Many charities could turn a profit and still be providing a social good.  The line between socially beneficial and business is being recognized as transient because there are not many activities that could not be considered “charitable.”  The distinction we’re accustomed to is the artifact of a custom whereby services for those in need were organized by nonprofits.  For-profit entrepreneurs and executives are only now realizing that, for the most part, the only thing preventing them from being a nonprofit is “inuring” profit.  The biggest disadvantage to filing as a nonprofit is the access to investment capital.  Hence comes the L3C designation.

L3C stands for a low-profit limited liability company.  Essentially, they are for-profit companies that, for providing a social good or service, can accept return-bearing investments from traditional nonprofit sources, like foundations and governments, (called “program related investments“) but cannot have profit as a “significant purpose.”  While the initial rationale for the L3C was to enable would-be nonprofit organizations to gain more (traditionally capitalist-like) investment, it can go both ways.  Would be for-profit companies (who happen to provide a charitable service) can adopt the L3C as a sign of their ethical commitment to consumers. (What operations and rules define profit as a non-“significant purpose” is left wide-open (4th paragraph), hence I only assert that the L3C is an ethical signal, rather than an operational restriction)

Capitalism would be completely different if the business community recognized that what many of them produce could be considered charitable in a legal sense.  Imagine a world where McDonald’s, Walmart, and Coke are nonprofits (or L3C’s. I want to address the question of capital access in a later discussion).  They already provide cheap food, clothing, potable water, and other essential items to billions of people.  Would you buy a burger from a nonprofit McDonald’s or a for-profit Burger King?  Would Walmart clothes still be made in sweatshops?  How silly does the ideology of shareholder value sound now?

There is no clear push for this radical of a restructuring of capitalism.  But, the emergence of new energizing strategies in business, social enterprise in particular, indicates that Americans are seriously challenging our assumptions that conducting business is ultimately just for profit and providing services to those in need is just charity.  How far we could take it seems pretty revolutionary.

This entry was posted in Economy, Foundations, Nonprofits, Poverty and tagged , , , , , . Bookmark the permalink.

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