Is it a good idea to become a social enterprise or start a for-profit business to generate income for a non-profit organisation?
To clarify, a social enterprise non-profit must reinvest its profits for the benefit of the organisation. A non-profit organisation is generally a public benefit organisation and has tax exemption, regardless of whether it is a social enterprise and generates income. As a non-profit, such an organisation would specify in its founding documents the objectives it has been established to achieve. The types of activities it carries out must be in line with these original objectives, and the way the organisation gets funding (from a donor or income generator) is secondary to this. An organisation must not stray from its aims and objectives as there are tax implications for income generated from products and services not related to an organisation’s core aim.
If an organisation sets up a separate business, generated income cannot be tax exempt as it is not income generated through the delivery of core services. The organisation will need to “ring fence” the financial operations of the separate for-profit, which itself would require its own budget and resources. Running two organisations can be hugely resource intensive and distracting – a for-profit and non-profit model require different types of expertise and resources and it is extremely tricky to pull both off successfully. The most advisable option to generate income would be to find a way to offer training or services for a fee, and reinvest profits back into the organisation.
Author: Alex O’Donoghue: Development Co-ordinator, Inyathelo: The South Africa Institute for Advancement