The pandemic has had devastating impacts on the nonprofit sector as a whole, especially on the financial stability of many nonprofit and charitable organizations.
According to a recent Imagine Canada Sector Monitor report, revenues for Canadian charities are down 55% since the beginning of the pandemic and about 75% of charities report lower revenues from at least one source of funding. Organizations with earned revenue have been the hardest hit by the pandemic, however, as the effects of the pandemic wane, and earned revenue begins to recover, these organizations may be well positioned to embark on social enterprise.
As for funding from government, while certain subsectors have benefitted from temporary pandemic relief programs from the federal government, it is clear that this funding will not be sustained. On February 25th the provincial government announced Alberta Budget 2021; the budgets for ministries related to the nonprofit sector were either reduced or remain flat.
The (Social) Entrepreneurial Approach
With increased demands for services, and funding from donations and government sources drying up, what can nonprofit organizations do to remain sustainable?
One option is to consider social enterprise. One of the recommendations in the 2020 report on civil society recovery provided by the Premier’s Council on Charities and Civil Society was to prioritize innovation and capacity building in the areas of fundraising, social finance and social enterprise.
What is social enterprise?
At IntegralOrg we use the definition of “Social Enterprise” from Employment and Social Development Canada, which has also been relied on by the Canada Revenue Agency (CRA):
A social enterprise is an innovative business model, whether not-for-profit
or for-profit, that pursues a social, cultural or environmental mission through
the sale of goods and services, with the majority of net profits directed back to its mission.
As there is no designated legal structure for a social enterprise in Canada, they can be structured as either for-profit or nonprofit entities. A nonprofit or charity that earns revenue through the sale of goods or services inevitably directs that revenue back toward the social mission of the organization. In other words, nonprofit and charitable organizations that sell products or services to earn revenue are de facto social enterprises.
A few examples of Alberta nonprofit social enterprises
EthniCity Catering: A program of the Centre for Newcomers in Calgary, EthniCity Catering is a full commercial kitchen and catering business that provides culinary work experience and training to immigrants and refugees to facilitate their transition to Canada.
Newo Global Energy: A non-profit company with a mission to foster communities with healthy ecosystems, Newo Global Energy provides solar energy services for individuals, organizations, and communities. They deliver education and training programs in partnership with charitable organizations across Alberta.
Goodwill Industries of Alberta: A registered charitable organization that operates 13 thrift stores across Alberta to support employment and training opportunities for people with disabilities. According to its 2019 Annual Report, the sale of donated merchandise through the thrift stores generated approximately $30 million in revenue for Goodwill, which accounted for around 92% of its total revenue.
Elevating Nonprofits in the Social Enterprise Ecosystem
The concept of earning revenue through business or commercial activities is not new to the nonprofit sector. Earned income has been a large and important source of revenue in the sector for a long time.
According to Statistics Canada, the percentage of the total income of nonprofits institutions in Canada that came from the sale of goods and services was consistently between 40% and 46% from 2007 to 2017. However, many nonprofits do not frame or promote their activities as “social enterprise.” For example, a 2013 survey from Imagine Canada indicated that most charity leaders do not consider their earned income activities to be social enterprise activities. For example, many charitable and nonprofit museums and galleries operate gift shops or food kiosks within their facilities. While these activities are generating income to support the socially beneficial work of the organizations, oftentimes they are not presented to the public as social enterprises.
Aligning with the social enterprise movement is an untapped opportunity and could be a beneficial strategy to elevate the profile of many organizations, especially in reaching younger markets; the concept of social enterprise is attractive to both Millennials and Generation Z. The 2020 Consumer Culture Report from 5W Public Relations indicates that 71% of Millennials would pay more for goods that funnel some portion to charity, and 67% said that it is important for brands they purchase to have a charitable component. Nonprofits running businesses to earn income could benefit from tapping into these markets more effectively.
Approach with Caution
Social enterprise or earned income activities offer many advantages, including increasing and diversifying unrestricted sources of revenue; increasing visibility and awareness; and providing a vehicle for social innovation.
However, social entrepreneurship is by no means a silver bullet for the challenges facing the nonprofit sector, and it should not be viewed as such. Like any start-up business, social enterprises are unlikely to be profitable during their first few years of operation. As such, engaging in business activities should be a long-term strategy, not a short-term or band-aid fix. The 2013 data from Imagine Canada indicates that of the charities that engaged in earned-income activities, 42% generated a surplus, 27% broke even, and 31% generated a deficit.
There are numerous legal and regulatory risks involved in operating a social enterprise. Due to their tax-exempt status, nonprofit and charitable organizations are legally restricted in the type and extent of commercial activities they may engage in. It may be necessary to structure a social enterprise as a separate entity in order to remain compliant. Organizations looking to integrate social enterprise into their operations must understand whether this course of action is clearly aligned with the mission and strategic direction of the organization.
There are many risks involved in taking on a business, and these need to be well understood at the staff, executive and board levels and whether an entrepreneurial approach will fit with the organization’s culture.
IntegralOrg has launched the Social Enterprise Legal Structures Toolkit to guide Alberta organizations and entrepreneurs interested in developing a social enterprise through the decision-making process of selecting a legal structure. Also available is a recording of IntegralOrg’s webinar: Start Your Social Enterprise the Right Way: A Panel Discussion about Social Enterprise and the Legal and Regulatory Environment. Follow us on social media, subscribe to our newsletter, and stay tuned for more information on upcoming social enterprise training and tools.
Kristina Roberts is a lawyer with experience in public interest matters and social entrepreneurship. She articled at a regional firm in Calgary specializing in municipal law and was called to the bar in Alberta in 2019. At IntegralOrg, Kristina is responsible for developing a toolkit to assist organizations and entrepreneurs with structuring social enterprises, as well as overseeing and assisting with various other legal initiatives relevant to the charitable and nonprofit sector and the organizations that IntegralOrg works with.