Why would West Michigan nonprofit entities consider opening a for-profit business? The answer lies in trying to generate consistent and sustaining revenue. The last few years have produced a rollercoaster ride of giving and donations, which has left most nonprofits reaching for the safety bar and buckling in. The year 2021 saw high levels of total national United States giving topping $500,000 billion. Then 2022 brought a 10.5% (adjusted for inflation) decrease in giving compared to 2021.The most concerning aspect of this fluctuation is the decrease in individual donations, which is historically the source of most donations. This recent volatility in giving from individual donors, which historically comprises approximately 60-65% of all donations, has impacted the entire charitable giving landscape. Nonprofit organizations must turn to new and innovative mechanisms of generating more consistent and sustaining revenue, and developing a for-profit social enterprise can be just what is needed to fill the void.

Social Enterprise

West Michigan nonprofits cannot escape these giving fluctuations. One tactic is to develop new income streams making nonprofits less reliant on individual donors. A social enterprise is a wholly owned subsidiary of a nonprofit organization, that is, a for-profit business that creates earned income. This new earned income stream offers a nonprofit a mode of funding not reliant on individual donors. There are many forms of social enterprise two of which are donate-to-sell and traditional business models. 

Donate-to-Sell

Historically, the thrift store is the most practiced form of social enterprise. It is known as the ‘donate-to-sell’ method which many people have experienced. Simply, non-profit entities accept donations of gently used items, such as clothing, furniture, household items, electronics, and other goods, from individuals and organizations. These donations are then sorted, cleaned, and priced for sale. Recently, thrift stores have become savvier with selling techniques. Nonprofits sell the goods through various channels, such as traditional brick-and-mortar, online marketplaces such as Facebook, and pop-up shops. The profits generated from the sale fund various social programs, environmental initiatives, or other charitable activities.

The donate-to-sell model is a popular model but lacks creativity and has a few drawbacks discussed later. The benefits of this model remain strong and include affordability, a positive impact on the environment, creating a circular economy and serving the community’s needs. These stores focus on selling second-hand goods at a lower cost than traditional retail stores, making an affordable shopping option for consumers from all income levels. It provides an opportunity for individuals to support a charitable cause by simply donating items no longer needed, which can be resold to generate revenue for the cause.

One often overlooked benefit of this model is its positive impact on the environment. It reduces waste and promotes sustainability. By accepting and selling donated goods, nonprofits prevent items from ending up in landfills, reducing the environmental impact of waste. It also promotes a circular economy, where resources are kept in use for as long as possible, reducing the need to produce new items. These organizations also serve to fund a variety of community-based needs. Examples of nonprofits in West Michigan running a donate-to-sell operation include homeless missions in Grand Rapids, Holland, and Muskegon, as well as several pet charities in those same cities.

Overall, the donate-to-sell model can create a win-win solution for all involved. Donors get rid of unwanted items while supporting a charitable cause, non-profit entities generate revenue for its mission, and the environment benefits from the reduction of waste. Unfortunately, a few downsides do exist. Thrift stores often struggle with location concerns, as well as the need to pay rent, salaries, and other expenses such as utilities. Furthermore, with online options for purchasing inexpensive and recycled designer clothing and limited demand in the international resell market, thrift stores are not always the best choice for an earned income stream and can result in low profits and margins. It remains a wonderful example of using social enterprise, but it can be challenging to execute.

Traditional Business Model

When seeking to develop a different type of social enterprise beyond the donate-to-sell model, the tried-and-true traditional business model offers the most flexibility. The traditional business model involves generating revenue through profitable business activities and using the profits to support social or environmental causes. This model allows social enterprises to create sustainable revenue streams while also making a positive impact on the world. Board members, major donors, and the local community may be a source for opportunities and ideas. Never underestimate the power and ease of tapping into these resources.

A strong local example of the traditional business model of social enterprise is Hope Network, a non-profit organization operating a variety of revenue generating businesses, including coffee shops, print shops, and retail stores. Profits from these businesses are used to support job training programs for individuals with disabilities, mental health issues, and other barriers to employment. Another local non-profit, BErista, INC opened a coffee shop in Grand Haven specifically focused on “meaningful employment for people with intellectual and developmental disabilities” (Kenzie’s BE Cafe, 2023). Another excellent West Michigan example is Guiding Light, a Grand Rapids substance recovery-focused non-profit operating The Job Post, a job placement service serving both its clients and the local community of job seekers and Grand Rapids firms with hiring needs.

The key difference between a traditional business and a social enterprise is the purpose of the profits. In a traditional business, profits are distributed to shareholders or reinvested in the company to support growth. In a social enterprise, profits are reinvested in the mission of the organization, which often involves creating a social or environmental impact.

An advantage of using the traditional business model form of social enterprise is that it allows for flexibility in the types of businesses created to support the social mission. For example, a social enterprise could operate a coffee shop, a farm, a clothing store, or a technology company, if the profits are used to support the social mission. This flexibility allows social enterprises to pursue a wide range of business models and to adapt to changing market conditions. This type of social enterprise can truly support the goal of the nonprofit while providing additional funding which can replace declining or volatile individual donations.

A key factor in creating a successful social enterprise is to ensure the choice of business aligns with the non-profit mission, goals, and constituents. In the examples above, the coffee shop, job placement, and retail businesses all align with the originating non-profit’s cause and existing resources. Business ideas that stray too far from the mission and focus of the nonprofit are more difficult to manage, align with a core vision, and may not leverage the goodwill of primary supporters.

In addition, the social enterprise must succeed as a legitimate business and compete in the business environment in which it exists. A customer may try an organization’s social enterprise product/service once due to the cause relationship; however, they will not be retained as long-term customers if the business does not satisfy their basic needs. Shopping or otherwise being a business customer is not an act of charity. Donors donate, and patrons shop. Shoppers will not return if the product or service is not competitive with its business peers, and it must satisfy the customer’s needs.

 As with all major changes, the nonprofit should address all legal considerations, and consult legal counsel at all stages of developing and launching a social enterprise. It is critical the incorporation is done correctly since doing so will eliminate future problems and stresses. There are several options for incorporation under the nonprofit corporation. These include LLC, S-Corp, and the lesser-known L3C, focused on low-profit enterprises committed to social goals.

 Do not forget the accounting and tax details. While not the most “fun” to consider, it is vital. The primary concern centers on the limits to generating earned income in maintaining the 501c3 status. Consultation with a CPA specializing in tax-related issues, since nonprofits can face tax ramifications while engaging in social enterprise activities to maintain their 501(c)(3) status, is a must. A common tax issue related to establishing a social enterprise revenue stream is unrelated business income (UBI). The IRS defines UBI as income from a trade or business that is ongoing and not substantially related to the organization's purpose. In relation to social enterprise, the income generated from it could be qualified as UBI and subject to tax. If a 501(c)(3) organization has $1,000 or more of UBI it must file Form 990-T with the IRS and it must pay estimated unrelated business income tax if it expects its yearly tax to be $500 or more.  

 Additionally, if a nonprofit organization generates too much UBI, it might place its 501(c)(3) status at risk. Statutory guidance notes having 50% or more of an organization's total gross income being UBI could result in complications. It is crucial to understand that 50% is not a bright line but truly a fuzzy line. There is no specific statutory guidance, and implications might result even if UBI is under 50 percent. The best advice is to seek guidance from the IRS and a CPA specializing in nonprofit tax matters if UBI begins to creep up to 40 percent (Fritz, 2017).

 In conclusion, creating a social enterprise provides nonprofits an opportunity to seek alternatives to generating revenue which reduces reliance on individual donors. With individual donations fluctuating in recent years, it is risky to rely too heavily on the funding source. A triple threat exists relating to 1) the unpredictability of individual donations year-to-year, 2) the aging base of the average donor, and 3) the recent decline in the amount of the average individual donation. These threats combine to necessitate a change in how nonprofits ensure solid future funding streams. Creating the right social enterprise will supplement fluctuating individual donations and support programming goals. Searching for social enterprise opportunities should be a natural extension of a nonprofit’s mission and provide opportunities for constituents and donors to engage with an entity’s mission. Developing a social enterprise can be the key to propelling the mission and nonprofit organization into the future.

Fritz, J. (2017). Generating Income through Social Enterprise. Nonprofit Quarterly. Retrieved from https://nonprofitquarterly.org/generating-income-through-social-enterprise/ 

U.S. Philanthropy Plummeted $17 Billion As Donors Disappeared – The NonProfit Times. (2020). Retrieved from https://www.thenonprofittimes.com/fundraising/u-s-philanthropy-plummeted-17-billion-as 

Total Giving Declined 3.4% in 2018 to $427.71 Billion Following Two Years of Record Generosity - The Chronicle of Philanthropy. (2019). Retrieved from https://www.philanthropy.com/article/Total-Giving-Declined-34-in/245018 

Charitable Donations. (2020). Retrieved from https://www.irs.gov/charitable-contributions/charitable-deductionshttps://thenonprofittime 

U.S. Philanthropy Plummeted $17 Billion As Donors Disappeared. (n.d.). The NonProfit Times. Retrieved from https://philanthropy.iupui.edu/news-events/ne 

Unrelated business income tax. Internal Revenue Service. (n.d.). https://www.irs.gov/charities-non-profits/unrelated-business-income-tax 

Our Mission - Kenzie’s BE Cafe (2023). Retrieved November 7, 2023, from https://kenziesbecafe.org/