Both non-profits and social enterprises are trying to create positive social change in their various fields and have some similarities. However, they are actually very different in many regards.
We’ll break down the key differences to help you understand why these are two separate kinds of organizations. This will help you to better understand the distinction and may be valuable if you are looking to start up one or the other.
Revenue Generation
One of the key differences between a non-profit and a social enterprise is how they make their money. Both direct money towards important social causes, but they make this money in vastly different ways.
Non-profits generate income primarily through donations, fundraising, and grants. They are reliant on external sources of funding and secure this funding because people support their cause.
Social enterprises, on the other hand, operate like a business where they sell a service or product and generate their own revenue. This makes them more financially self-sufficient than a non-profit.
Organizational Freedom
With a non-profit, there are a lot of restrictions on how they can operate. They are required to be very transparent about the flow of money in and out of the organization. While they can pay their employees’ salaries, they cannot use revenue generated to boost those salaries.
On the other hand, social enterprises are controlled by less legislation and have more leeway when it comes to their choices. They can operate for profit, provided that they are founded on the principle of advancing a social good. There is less oversight of their finances, and they are primarily accountable to shareholders, rather than the government.
If you are wanting to work with either a non-profit or a social enterprise, a Master’s in Social Work is a great point of entry. Check if you meet the requirements for an MSW degree as a stepping stone to making a difference in the world.
Tax Status
One example of the strict regulations around non-profits is the fact that they have to redirect all of their profits back into their work. The flip side of this is that they are tax-exempt under Internal Revenue Code Section 501(c)(3).
This is a significant benefit but comes at the cost of a higher degree of regulation, with there being a long list of federal tax obligations for non-profits.
Social enterprises have less legislation controlling them but are required to pay taxes just like other businesses.
How They Operate
Non-profits tend to focus on running projects that require funding, whereas social enterprises operate like a business that generate their own income.
However, this is not always black and white. One example of a non-profit that does sell a product is the Girl Scouts. However, all money made from the sale of their cookies is immediately directed into funding their ongoing social projects.
Non-profits put 100% of the money they raise back into their operating costs and projects, whereas social enterprises have more freedom in how they distribute their earnings. Each social enterprise will have a different split between social and financial returns.
When it comes to supporting either a non-profit or a social enterprise, it is important to do your research so that you know exactly where your money is going. This research is easier to do on a non-profit.
Return On Investment
Social enterprises can attract investors who get a return on their investment (ROI) based on the profits generated by the organization. This is an incentive that non-profits cannot offer, and they must instead rely on altruism.
The looser legislation around social enterprises means that they can operate at a profit, allowing them to be viable businesses while also doing important social work.
However, there is also a risk because of the lack of legislation. As consumers become more socially conscious, companies could label themselves as social enterprises without having a significant social mission.
Self-Sufficiency
One of the major benefits of social enterprises because they can generate money more efficiently than non-profits by operating like businesses. This is a big positive because non-profits can run into empathy fatigue and low donations.
In this situation, a non-profit is not able to sustain itself. However, because social enterprises can provide financial ROI to their investors and shareholders, they are more likely to be financially stable long term.
However, there are many benefits to being a social enterprise vs a non-profit, and vice versa. The right choice is very situation-specific and depends on what the founder’s goals are.
