Run Like a Business? Can Nonprofits Do This?

Dan Pallotta’s message is music to my ears. Check him out on Ted (ow.ly/iVJJS). Coming from a business background to the nonprofit world 15 years ago, I was shocked by so many of the attitudes and expectations that came with the new job - primarily "we want you to run this like a business, yet we don't have money for marketing, or I.T. Also, no loans - that would appear as reckless to our stakeholders."  And we wonder why the nonprofit sector, in general, is behind. With new technologies and data analytics, the purchase of segmented and highly-focused ad placement takes much of the risk out of those types of investments. In addition, without the capital to test new programs, how is the sector expected to be innovative? And finally, unless nonprofits can begin offering competitive salaries, they will not be able to attract or retain the talent that needed to thrive. It’s time to begin a national dialogue about how nonprofits need to operate if they are going to survive. With some important policy changes – increasing the overhead threshold and appropriate compensation levels, that just gets us turned in the right direction. There is much work to be done. How do we begin?

In the meantime, take a look at our traditional model - the 501 c3 versus some new corporations and hybrids. Could some of these corporate structures be more advantageous and more palatable to funders?

1. Traditional Nonprofit - 501(c)(3) Organizations

 According to the IRS:

An organization must be organized and operated exclusively for exempt purposes set forth in section 501(c)(3), and none of its earnings may inure to any private shareholder or individual. In addition, it may not be an action organization, and it may not participate in any campaign activity for or against political candidates. These organizations are referred to as charitable organizations and are eligible to receive tax-deductible contributions

2. For Profit Organizations (Social Entrepreneurialism)

According to “A New Type of Hybrid”, Stanford Social Innovation Review, Spring 2011.

B Corporation is a brand, certified by B Lab (itself a nonprofit), rather than a legal form in the eyes of the IRS. To be certified a B corporation, the owners and managers of the organization voluntarily submit themselves to a rigorous battery of questions and tests that measure their commitment to social values and socially and environmentally responsible practices.

A Benefit Corporation is a legally distinct type of business corporation that is committed to accomplishing one or more social or public purposes. A benefit corporation must specify in its charter that it is formed to pursue a social purpose. It must be certified by an independent third party as complying with standards promulgated by the certifying agency, and it must produce an annual report that explains what it has done during the prior year to accomplish its social mission.

L3Cs, low-profit, limited liability corporations are designed to be a hybrid between a charity and a for-profit business. The creation of the L3C structure started with nonprofits that face a rapidly shrinking pool of charitable funds, grants, and foundation resources. But although public funding is quickly evaporating, the number of private interests willing to invest in socially-driven endeavors is multiplying in leaps and bounds.

3. Hybrid – Working Together

Instead, the hybrid uses a series of contracts and agreements to combine one or more independent businesses and nonprofits into a flexible structure that allows them to conduct a wide range of activities and generate synergies that cannot be done with a single legal entity. The entities that generally make up a hybrid are distinct for legal purposes, and each is responsible for compliance with the laws and regulations that govern it, but when properly structured, the legally distinct entities can behave much like a single entity. For these reasons, a hybrid is often a better solution than a single legal entity that tries to incorporate a wide range of activities.

What are your thoughts? Do you agree with Dan Pallota? Do nonprofits need to have access to capital, technology, competitive pay, and more lobbying power to be successful?