Legal Briefs: Measuring Social impact

Business and philanthropy have traditionally formed a dichotomy. Business is the pursuit of monetary profits, philanthropy the pursuit of social good with donated money.

This dichotomy has been eroding so that a complex spectrum has developed between business and philanthropy, with pure profits and pure charity situated at the extremes of that spectrum and the middle of the spectrum composed of organizations that incorporate charitable and for-profit elements in different ways. These hybrid organizations may be called social impact companies, benefit companies, venture philanthropy or social enterprises.

Organizations can creatively hybridize charitable and for-profit elements in a variety of ways. A for-profit company may simply seek to do social good while making a profit for its shareholders. More complex models can involve tax-exempt charities that, at some level, incorporate commercial or for-profit activities into their structure and operations. Sophisticated counsel is often needed to avoid serious tax risks in establishing such an operation, but there is more leeway for tax-exempt entities to engage in commercial activities than many first imagine. If well designed, it can be a powerful engine to maximize social impact.

Two examples provide a glimpse into the variety of potential social impact models that are based on a hybrid of for-profit and charitable elements to maximize social impact. One is a U.S.-based 501(c)(3) tax-exempt charity with on-the-ground foreign operations and employees. This organization owns a for-profit subsidiary whose commercial activities serve two goals: They directly further the charitable parent companys tax-exempt purpose, and the resulting profits provide funding for the charitable parent. Ideally, the for-profit subsidiary will fully fund its parents operations, resulting in a self-sustaining social impact organization.