Blake Mycoskie of TOMS recently had appearances to both SXSW in Austin, TX and the Association of Fundraising Professionals (AFP) International Conference in Chicago. I learned about his inspiration and motivation around his now famous TOMS brand and one-for-one movement.
Combining social good and the power of consumers is nothing new.
I came across a great article by Allen R. Bromberger, A New Type of Hybrid. In it, he discusses how social entrepreneurs are using a hybrid model to combine the for-profit and nonprofit models.
Museums and performing arts organizations create for-profit retailers to sell merchandise, such as posters, jewerly, and books. And the hybrid model is nothing new to public broadcasting. The Children’s Television Workshop, owners of the Sesame Street characters, use separate nonprofit and for-profit organizations to both achieve business objectives and further a social mission.
Dan Pallotta, in his book, Uncivilized, points out why this arm’s length model is used for supporting social good with commercial activities. Rather than being politically or economically motivated, it was a religious view held by the Puritans who came to America in the 17th century. They believed that any commercial activity was sin. However they also understood it necessity, so to atone you could perform charitable activities and – never the twain shall meet.
In his article, A New Type of Hybrid, Bromberger discusses how modern social entrepreneurs are using separate, but contractual linked entities to accomplish their goals.
For any nonprofit concerned with the legal implications of UBIT (Unrelated Business Income Tax), or for-profit entities concerned that the pursuit which want to pursue a social mission, a single hybrid structure that contractual binds the nonprofit and for-profit entities may be a solution.
But Bromberger points out, it isn’t simple.
In the article, Bromberger describes various types of legal entities typically used in social entrepreneurship including, B corporations and benefit corporations and how they differ as well as the low-profit limited liability company (L3C) option.
He describes legal options to enter into activities together to achieve social good.
- Parent-subsidiary model – where a nonprofit creates for-profit subsidiary
- Commercial transactions and collaborations between nonprofit and for-profit companies (arm’s length model)
- Corporate sponsorships and commercial co-ventures
- Contractual hybrids
There is also a great discussion of legal ramifications of some of the various options and Bromberger spells out the particular IRS rules to consider.
- Joint Ventures
- Private Benefit
- Unrelated Business Income Tax
- Conflicts of Interest
- Related Party Transactions
- Form 990
The lively comments are also a must read. One commentor notes a new option being considered in California which would allow the formation of a Flexible Purpose Corporation (Flex Corp.) You can read more about it in California to Allow Corporations to Blend Mission and Profit at corpgov.net.
I also loved Milton Friesen’s comment about using the open source model – create a platform upon which individual organizations can built new models – like allowing developers to create apps for an app store.
So what does all this very geeky, public policy mumbo jumbo mean?
Through open collaboration, we can essentially crowdsource innovation in social good and social entrepreneurial models! How cool would that be!