Personally, I think the more appropriate question is shouldn't we being utilizing tax policy to incentivize the creation of more socially minded corporations? Why not offer a carrot to businesses who are socially responsible corporate citizens?

From years of study in Political Science, it was always drummed into my head the proper use of taxes is to encourage desired behavior through tax incentives, and discourage undesired behavior through increased taxes.

Why is profit considered immoral? Profits represent resources of growth -- either in the for-profit, non-profit or governmental sectors.

We should encourage businesses to create more profit, and then encourage them to invest those profits in the non-profit sector to address social issues. If a hybrid organization springs up, wonderful! That would be a product of evolution and should be celebrated.

“Be Careful What You Wish For” (see also the Chronicle article
"Governments Seek Tax-Like Payments From Nonprofit Groups"

This is the logical result of the cacophony of non-profit voices that have been calling out for the past decade (or longer) "We want to me more like a business!"

Now the other shoe is dropping -- local governments are about to grant that wish, and tax non-profits as a business!

I've been making this point for a while now, if you keep saying,” Non-profits are businesses,” we're sowing the seeds of our destruction.


Here's the link to my August 2008 post about exactly this issue on the Tactical Philanthropy blog:

http://www.tacticalphilanthropy.com/2008/07/untapped-information

Here's a partial quote from my August 4, 2008 comment:

I think the non-profit sector sells itself short when it jumps up and down and says "we need to be more like a business!"

Non-profits are fundamentally different than businesses and if you beat that particular drum loudly enough, and long enough, a very good question is going to be -- "If you're just like a business, why shouldn't you be taxed like a business?"

Regards,
Bill Huddleston
The CFC Coach
cfcfundraising dot com
new email- billhuddleston1@gmail.com

The point to make is not that "nonprofits want to be more like business." The point is that when businesses operate as hybrids and demonstrably serve social purposes in addition to making a profit, then that's a good thing and we should find ways (through the tax code and otherwise) to encourage that behavior. More importantly, we should be searching for ways to make capital available to such hybrid enterprises, so that they can more quickly scale up potential solutions to social problems. Many are already hard at work on practical and meaningful ways to measure the social benefits such hybrid enterprises may provide. Consider a company that believes it has a way to build very low-cost housing for the homeless (just to use an example), while at the same time making a modest profit and reinvesting any excess in its efforts to scale up that solution in multiple communities. If it's able to make a modest profit, some investors (including some institutional investors) may be willing to devote a certain part of their investment portfolio to the company. And they might be even more likely to do so if, for instance, their investment received some sort of favorable tax treatment or the gains they receive from the company's growth received slightly different treatment. It's unclear how much of an impact such differential tax treatment might have on a potential investor in a hybrid business/social enterprise. But there's certainly a reasonable case to be made that while these potential investors might not be willing to literally donate, say, 5% of their wealth to charitable organizations, they might be willing to have 5% of their wealth invested in a few businesses that provide a lower rate of return while also providing important social benefits. And that kind of investment could make an enormous difference in the amount of funding available to help address social concerns. Nonprofits may be understandably concerned that tax breaks for hybrid enterprises will divert important funding sources from charitable organizations. But this shouldn't be viewed as an either/or situation, nor should the tax treatment of nonprofit contributions be identical to the tax treatment of investments in hybrid social enterprises. It ought to be possible to develop (tax or other) incentives for the development of capital markets for these hybrid enterprises, without jeopardizing the current tax treatment of charitable contributions. Will it be easy to do? Nope. Does that mean we shouldn't be exploring it and searching for ways to do it? Of course not.

The previoius comments assume that hybrids are created based on socially responsible motivations. What about those for profit enterprises that form nonprofit, charitable operating arms of their for profit with tax-free PR in mind first and social responsibility somewhere lower on the list?

To the contrary, I make no assumptions about exactly which types of enterprises ought or ought not have the advantage of tax or other incentives. Clearly, what criteria are to be applied is an important and thorny issue, along with dozens of other thorny issues along the way (as I said, it won't be easy). My point is simply that we can view this notion as a poptential risk for nonprofits, or we can view it as a potential opportunity to greatly increase the amount of time, energy and money devoted to addressing social problems. I embrace the latter view.

Those aren't the only options, and my major point is that the non-profit sector has done a poor job of anticipating the negative consequences of their own actions. I talk to a lot of executive directors and development directors and when I ask them what they need most, money is always in the top three of their list, and particularly unrestricted funds.

Here's the example from my Nov. 2009 blog post:

Non-profits Are Not Businesses, Part II: Program vs Operating Costs
Give While You Live and Give Without Strings

In part I, I said that:
The non-profit sector has done a spectacularly lousy job of explaining what it does and how it does it, and has spent fifty years convincing the American public that "administrative expenses" are bad and that "program costs" are good and now complains about how hard it is to get unrestricted funds.
Let me elaborate on this point, because I do think it is "chicken and egg question" - which came first, did the donors request to know the percentage of administrative costs, or did the non-profit in an attempt to compete for funds, say "Our administrative costs are lower than the other guy's."

What a dumb thing to say.

Only in the non-profit world do we push the "how" of a service or good as the means of convincing donors or grant-making organizations to fund us.

Think about it for a minute, when you go to get your car repaired, you presumably go through these steps:

1. You take it to a garage or dealer that you either have direct experience with, or was recommended by a friend, or you looked it up on the web.

2. You describe the problem with the car (your need).

3. Their mechanic diagnoses it, and calls you back with the recommended solution and estimated cost.

At this point you make your decision, and there are only 3 possible choices:

1. You have them fix it.
2. You decide their price is too high and you might be able to get it fixed somewhere else cheaper.
3. You decide that the problem is not as critical as you thought and you can live with it for some amount of time, whether the ultimate solution is to get a new car, or to have it fixed later.

Notice, nowhere in this decision process did you ask these questions:

1. How much are you paying your mechanics?
(I only want the cheapest mechanics possible to work on my car.)

2. What brand of tools and diagnostic equipment are you using?
(I don't want to pay for the use of modern tools and computer equipment, my grandfather was a mechanic and he didn't need any new-fangled gear to fix cars).

You can substitute almost any service or good you want and you can have a similar sequence: Dentist - I only want the old drills used (you know the slow, loud, painful ones from your childhood).
Coffee server: What brand of coffee roaster/maker are you using,

I'm only going to pay for one that's cheap.
What the non-profit sector does not do well, is to make the case as the difference between "What & Why" versus "How." "What & Why" should matter a lot to the potential donor, that is why you are talking to them, and why they are considering giving you some of their money. Your mission resonates with them in some way, whether because they or a family member or someone they know has had direct experience with your organization, or they just have heard about you and care about what your organization does.

The things that truly matter to donors are "What does your organization do?" and "Why do you do it?" If you answer those two questions, and you can certainly say, "Ten dollars a month helps us do ________ for the _________ in our community, or overseas, or in ________ this part of the country.

In a rush to compete against other non-profits, many non-profits then also answer the "How question" - even if it hasn't been asked. What's said is "We keep our overhead costs low so more of your money goes to program."

What's not said is this, even if it is true:

"Keeping our "overhead low" means that we pay our staff a barely living wage, and have 30% turnover because as soon as someone has any outside needs (home, family, etc.) they can't afford to stay here." The fact that 30% turnover keeps the program from ever being as successful as it might be, is never mentioned.

In the 21st century, the distinction between "overhead" and "program" costs is meaningless. Ask the potential donor or funder if they use the telephone, e-mail and the computer in order to do their job, and if they work in an office do they sit on a chair and work at a desk, because given the emphasis on "low overhead" all those things are bad. Then ask them to keep track for 3 days of how they spend their time: are they using the phone and computer for personal, work, or civic functions, and that they need to submit the detailed timesheet with this to their supervisor.

The fact that in our modern society we still use accounting methods that were developed 7000 years ago to count crops and cattle is a subject for a different article, but it's worth mentioning. All marketing experts will tell you that your customers (donors) can be educated as to what's important and why they should choose you and your product or service. Just because it's for a non-profit and the direct benefit to the donor is harder to describe, it doesn't mean that it's not real.

The non-profit sector although it likes to although it likes to talk about the importance of collaboration, is often very close minded when it comes to fundraising. It views the world has having a "money pie" of a set size (charitable giving) and competes mainly against other non-profits for a slice of that pie. My experience is that it is possible to "grow the pie" by working in colloboration with other non-profits, and that the real competition for the donor's dollar is not between two different non-profits, but it's competing for attention among other discretionary spending, including sports, cable TV, $4 coffees, $200 shirts, toys, etc.

A lot of the problems that the sector faces, and believe me, I know that this is a particularly tough economic time, would be helped if this attitude and direction were encouraged: "Give While You Live and Give Without Strings." If you don't trust our organization to do what we've been doing, and have been successful at, that's fine - choose some other organization, but if our mission does resonate with you, don't hamstring us, we appreciate your unrestricted gift and you are making a difference by helping us meet our mission.

Regards,
Bill Huddleston
The CFC Coach
cfcfundraising dot com
New email: Billhuddleston1 at gmail dot com

To use a well worn cliche - this train left the station a long, long time ago.

Call them hybrid or whatever else, use of earned income strategies by nonprofits is not new and no more a threat than extinction from lack or resources/money. However, this should not be exclusively about the money.

When I work with faith-based (and other) nonprofits who are clearly embracing for profit enterprise it is always framed as a means to more important ends. More important than money, that is. Once seen as a vehicle that brings a positive community impact, creates meaningful relationships AND pays for itself - they are all in.

The other factor we are seeing is that successful business people are ready to invest capital into those ventures much more readily than they are willing to make a donation for that purpose. This seems to be part of the L3C rationale as seen in the connection with foundation PRI's.

The tax implications are a non issue to me. If you engage in business - pay the tax and move on. In terms of how government may or may not change tax exempt statutes we can count on this - they will impose what is best for themselves with little interest in its impact. As a nonprofit leader I will dare NOT bow to their altar nor conduct my work based of the fear of what they may do.

One last rant - I am living for the day when politics and politicians become as irrelevant to our daily lives as the framers of the constitution intended for them to be.

Simple facts of longstanding reality first. Any nonprofit can enter into a for profit business venture and make money for its nonprofit mission subject to UBIT-Unrelated Business Income Tax. I suspect the structure of the L3C offers an end-around the UBiT, or at least a more favorable tax situation than the UBIT offers the standard nonprofit.

In this sense the debate really does become one more about the cart and the horse, rather than the chicken and egg. It becomes a question of who has primary responsibility for driving the bus? In short, which bottomline acts as the ultimate decision-making authority in moving the enterprize forward?

The bottomline of a nonprofit remains its mission in all circumstances and pursuing the path that fulfills the greatest amount of its mission. The bottomline of a for profit remains first and foremost its ability to maximize profits. Of course, hybrids can attempt to balance these competing bottomlines. Perhaps even somewhat successfully most of the time.

However, sooner or later, in one way or another, and most probably often, these two very different bottomlines will prioritize contrary options or demand different choices between apples and oranges.

Which bottomline has the ultimate authority in making the choices in these instances?

In the nonprofit world, the mission will drive the decisions for the unrelated business income. In the for profit world, profitability will drive the choices for the organizational mission. Any suggestion that compromise can drive the bus here will serve both bottomlines poorly. In the final vote, the for profit business will chug along in fits and starts forfeiting competitive potential. Or, the nonprofit mission will compromise vision only able to reach the low hanging fruit.

Real life examples abound here. Ask Hershey's in court for the better part of the last decade about this very conundrum. Ask Ben Cohen about the socially responsible Ben & Jerry's as it drove the bus over the bottomline of corporate merger.

It really does come down to a question of philosophical priorities and ultimate authority! It reminds me of the ancient Chinese proverb: A man standing with each foot planted on two different boats heading out from shore will only end up in deep water.

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