Stanford Social Innovation Review

This is not an area that I have much experience with, so I only have a limited number of resources to suggest. I strongly recommend an organization that will probably be able to help you: Social Venture Network (SVN). Here is how they describe themselves: "SVN is made up of more than 420 of the brightest and most innovative engaging socially-conscious business leaders in North America." I suggest that you search their Web site for information. Two of SVN's members who are very active in the socially responsible business movement have written a new book that I also recommend, called Values-Driven Business. It is part of the SVN Book Series.

Another good source of information is B Corporation, an organization run by Jay Coen Gilbert that focuses on "for-benefit" organizations. He was featured recently in The New York Times business section.

If you search for "nonprofit earned income case studies" in Google you will get links to many sources of information. I briefly skimmed the first dozen items listed and found a link to the Fuqua School of Business at Duke University which led to the following web page. It lists several nonprofit earned income case studies. I think many of the other items in the Google search results will also lead to case studies and other hands-on information.

This is not an area that I have much experience with, so I only have a limited number of resources to suggest. I strongly recommend an organization that will probably be able to help you: Social Venture Network. Here is how they describe themselves: "SVN is made up of more than 420 of the brightest and most innovative engaging socially-conscious business leaders in North America." I suggest that you search their Web site for information. Two of SVN's members who are very active in the socially responsible business movement have written a new book that I also recommend, called "Values-Driven Business." It is part of the SVN Book Series.

Another good source of information is B Corporation, which is an organization run by Jay Coen Gilbert that focuses on "for-benefit" organizations. He was featured earlier this year in The New York Times business section.

Questions about pursuing 501(c)(3) status are best answered by an attorney or CPA licensed to practice in the state where your organization is located. I'm not an attorney or CPA, so I can't give an authoritative answer to your question, but I can tell you that many nonprofit organizations with 501(c)(3) status obtain revenue from business-like ventures that support their public-benefit objectives. Ticket sales revenue received by a community theater group or tuition revenue received by a college are typical examples. So your plans for advertising revenue as your primary source of income are not out of the question, but you need to talk to an attorney or CPA who works with nonprofit organizations to learn the specific IRS requirements. If you are affiliated with Lewis & Clark College, talking with someone in the office of the college's attorney or CPA might be a good place to start.

The IRS code section 501(c)(3) offers tax-exempt status to organizations based on their "purpose" and other considerations, rather than their primary source of income. Here is a summary of tax-exempt purposes from the from the IRS website:

"The exempt purposes set forth in section 501(c)(3) are charitable, religious, educational, scientific, literary, testing for public safety, fostering national or international amateur sports competition, and the preventing cruelty to children or animals. The term charitable is used in its generally accepted legal sense and includes relief of the poor, the distressed, or the underprivileged; advancement of religion; advancement of education or science; erecting or maintaining public buildings, monuments, or works; lessening the burdens of government; lessening neighborhood tensions; eliminating prejudice and discrimination; defending human and civil rights secured by law; and combating community deterioration and juvenile delinquency."

Questions about registering as an NGO and establishing a corporation are best answered by an attorney licensed to practice in the country where the organization is located. I'm not an attorney, so I can't give an authoritative answer to your question, but I have some questions for you. I recommend that you answer the following before you contact an attorney. Having the answers will help you provide the attorney with a clearer sense of your objectives and constraints.

Question 1: Why do you want to register as an NGO? What do you think NGO status will do for your shawl weaving business? Is it because you want to solicit contributions from government agencies or foundations?

Question 2: What makes you expect that your funding will be quite cumbersome and time-consuming? Why do you think establishing a corporation under the umbrella of an NGO will help you deal with the problem of cumbersome and time-consuming funding?

Question 3: Since NGOs are typically nonprofit corporations, why do you want to establish another corporation under the umbrella of an NGO? Is it because you want the shawl weaving business to be a for-profit corporation? If the primary purpose of your NGO will be to operate a for-profit corporation then you may not be able to qualify as an NGO.

Your questions about social entrepreneurship are very timely because the Stanford Social Innovation Review has a relevant article called "Social Entrepreneurship: The Case for Definition" in the current issue. It is available for free on the magazine's Web site. In addition to this article, you'll find a link called "Social Entrepreneurship", which will bring you to many other articles on the topic. Some of these are free while others require a subscription to SSIR. I hope the variety of perspectives and experiences presented will give you a good sense of this exciting and still-emerging field.

Your idea to hold a competition to create items that support the theme of your organization, then sell the items as a fundraiser, sounds good. Selling items, especially ones that support your mission, is not a conflict with your nonprofit status. A nonprofit organization can actually earn a profit and not pay income tax, because what we commonly call "nonprofit" status is actually "tax-exempt" status granted under Section 501(c)(3) of the Internal Revenue Code. There are some limits on the ways you can generate tax-exempt profits, and I am not an expert in the tax code, so please consult a Certified Public Accountant in your state for a formal opinion before proceeding. The CPA can also answer your questions about sales tax on the items you sell.

In addition to considering the tax implications, you should think carefully about the time and effort your organization will have to invest in this fundraising effort. You probably will not earn a large profit on the bookmarks and greeting cards that you sell because these are typically low value items. Prepare the best estimate you can of your expected total revenues, costs, and net profit before you decide what to do. It might make sense to just hold the competition as a way to increase public recognition of your organization and mission. You may decide to skip the manufacture and sale of the items if your revenue-cost-profit estimate shows that you would be better off doing some other activity as a fundraiser.

My quick response to your question--based on how you worded it--is that it is not worth charging your clients because the small fees will produce so little income. However, there are several assumptions built into your question, and they raise some important questions. How "small" does the fee have to be in order to avoid discouraging your clients from using your services? If the client fees "cover very little" of your costs, what are your realistic options for covering the remaining costs? Is there a good reason to charge a small fee even though it generates very little income? (Perhaps clients would use your health services more thoughtfully, for example.) Would charging a fee be a simple first step for your organization to try and evaluate, before undertaking the additional effort of finding other income sources?

Not knowing your specific circumstances, I'll suggest some general guidelines for generating income by charging your clients for your services. First, you should be clear about your objectives and your financial projections for the future. How much fee-based income do you need or want in each of the next few years? Is your fee-based income target based on an expectation that your other sources of income will not meet your future needs, or do you simply have a desire to diversify your income sources? Is your objective to become completely self-supporting and no longer dependent on any grants or contributions?

After clarifying your objectives, estimate the percentage of your fee-based income target that can realistically be provided by charging your clients. I assume from the way you worded your question that it will be a very small percent. What other sources of non-contributed income will you be able to find in order to meet your target? As with so many decisions, it comes down to comparing the benefits and costs of various alternatives. In addition to the "hard" costs associated with the effort needed to obtain additional fee-based income, consider the "soft" costs such as a negative impact on your organization's mission.

Here are some questions you need to answer before moving forward:
1) What are the best two or three opportunities for generating earned income while still holding true to our values and mission?
2) What criteria are most important to our organization in choosing which of the options to implement?
3) What is the potential revenue that we could generate, over what period of time? And at what cost?
4) What staffing and other organizational capacity considerations should we consider in order to be successful?

Your concern about CPAs tending to specialize in either nonprofit or for-profit tax issues is valid. I'm afraid that I can't help you because I am no longer a practicing CPA. I suggest that you contact your local or state CPA society to see if they can help you find someone. For contact information for all state CPA societies, see this directory.

The term "earned income" covers a multitude of possibilities. Put broadly, it indicates almost any income which a nonprofit receives from sources other than contributions and grants. It is most commonly income from services provided or products sold. Many nonprofits (performing arts organizations, for example) generate substantial earned income, but a nonprofit with little or no earned income may want to evaluate ways to increase the amount of earned income it receives, in order to reduce its dependence on contributions and grants. See my ACT page for more information and an approach to evaluating a nonprofit's potential for generating earned income.

An evaluation of the feasibility of generating earned income would typically produce the following deliverables:

• A list of potential earned-income opportunities, with evaluation of fit/conflict with the nonprofit's mission

• A market and competitive analysis, including partnership opportunities if appropriate

• An assessment of the organization's capacity for success in generating earned income

• A financial model for projection and analysis of revenue and profit/loss potential

• An evaluation of alternative earned-income scenarios, with go/no-go recommendations

See my ACT page for more information and an approach to evaluating a nonprofit's potential for generating earned income.