An Expanding Sector of Entrepreneurship.

Charities  V/S  For Profit Structures

“Many social ventures operate as charities that foster dependence rather than rebuild communities (Peredo & Chrisman, 2006)” (Easterly, 2007).

Some social ventures operate as normal businesses (for profit vehicles) and create local value and builds self-reliance among the chronically unemployed, social ventures have often succeeded in solving social issues where charities have failed (Brennan & Ackers, 2004; Thompson & Doherty, 2006).

Although social ventures are businesses similar to for-profit companies, they operate with a strong social purpose mission. They often seek to employ disadvantaged groups of people or start businesses in impoverished communities that lack customers who can afford the products sold by for-profit companies, neither of which are attractive investments to for-profit companies that are trying to maximize profits (Seelos & Mair, 2005).

Successfully operated social ventures have added value to the community through increasing employment, social capital, local standard of living through retaining wealth in the local community, community self-sufficiency through production of value-added goods and services, and self-esteem, self-worth, and confidence of the employees they hire.

Worldwide issues of persistent poverty and unemployment have led many organizations and communities to establish social ventures to address these growing concerns (Seelos & Mair, 2005).

An increasing body of research confirms that the number of organizations that operate a sustainable business venture with a social mission is growing in many countries (Paton, 2003; Thompson & Doherty, 2006; Lisa Easterly, 2007).

Funding for such social ventures has become available from various international organizations and development institutions including the World Bank (Seelos & Mair, 2005).

However, the operation of social ventures faces diverse challenges and obstacles (Lisa Easterly, 2007) :

  • Managers often lack marketing, organizational, and management skills, as well as the financial resources to compete in the open market.
  • Not-for-profit organizations also face legal limitations when engaging in for-profit business activities and are often constrained by competing stakeholder demands that limit the social ventures’ ability to operate as a viable business.

By choosing to enter less viable markets or employing a lower-skilled workforce, social ventures operate at a competitive disadvantage as compared to their for-profit competitors. In the past, social ventures were able to rely on public funds and donations to help sustain their operations but decreasing public funds and growing competition for charitable donations has made it more difficult for these ventures to remain in operation (Brinkerhoff, 2000).

Faced with the challenge to become more competitive, many social ventures have adopted for-profit business practices including strategic management to remain viable while fulfilling their social purpose mission (Brinkerhoff, 2000; Dees, 2001; Easterly-Klaas, 2005; Viravaidya & Hayssen, 2001).

Main Legal Structures

Many social ventures are legally structured as a not-for-profit organization (Dees, 1998; Easterly-Klaas, 2005; Emerson & Twersky, 1996).

Still others have been established as for-profits, mutuals, co-operatives, or as partnerships between public, private, or nonprofit sector organizations (Brennan & Ackers, 2004; Easterly-Klaas, 2005; Maitland, 2006).

Charities, foundations and trusts            Non-For Profit

Social ventures (varying structures)           For- Profit

Other social ventures may be established as a subsidiary of a public sector entity. For instance, a psychiatric hospital located in a high unemployment region of Canada converted its hospital-based employment programs into social ventures including an industrial contract factory, a car wash, a sewing shop, a greenhouse, and three cafés (Krupa et al., 1999; Krupa et al., 2003).

However, the vast majority of social ventures that have been reported on are legally structured as not-for-profits, as a subdivision of a larger not-for-profit organization, or as a subsidiary not-for-profit or for-profit corporation held under the control of a parent not-for-profit organization (Dees, 1998; Paton, 2003).

While not-for-profit charity organizations address a wide range of social and environmental issues, social ventures are distinctly different from the organizations that create them (Emerson & Twersky, 1996; Thompson & Doherty, 2006). Social ventures are established to engage in competitive business activity, whereas not-for­profit charity organizations typically do not seek to become businesses and often remain heavily dependent on grants, gifts, donations, and government funding (Thompson & Doherty, 2006).

“When not-for-profit charity organizations engage in social venturing, they are faced with the challenge of fulfilling both their not-for-profit mission while at the same time striving to achieve profitability in the social venture. This dual mission focus may interfere with the not-for-profit organization’s ability to operate a viable social venture” (Easterly, 2007).

In most jurisdictions, to maintain tax-exempt status, not-for­profit organizations must adhere to strict legal codes. To be considered tax-exempt, income produced by a social venture has to be directly related to the nonprofit organization’s mission or social purpose, otherwise the nonprofit organization’s tax exempt status could be revoked (Brady, 2000; Hopkins, 2005a).

“Not-for-profit charity organizations typically operate as institutional organizations due to government control, soft budget constraints, disincentives for cost saving structures, and bureaucratic organizational structures (Bryson, 2004). These organizations do not operate to generate a profit and are legally prohibited from distributing financial surplus to those who own or control it (Brady, 2000; Hopkins, 2005a). In fact, as not-for-profits they are expected to distribute their surplus revenues back to the community that supports them. They are traditionally viewed as tools of the government for achieving social objectives (Low, 2006). This climate is not favorable to entrepreneurship, which is the process of creating a new business (Brinkerhoff, 2000)” (Easterly, 2007).

Ubilla & Cía helps in building innovative structures for social ventures reducing or eliminating these difficulties.