IB Docs (2) Team
Non-profit social enterprises
“We make a living by what we get, but we make a life by what we give.”
- Sir Winston Churchill (1874 - 1965), British Prime Minister (1940 - 1945 and 1951 - 1955)
Some social enterprises are not run for profit, such as non-governmental organizations (NGOs). NGOs are an example of non-profit organizations (NPOs) - legal entities organized and operated for a collective or social benefit rather than an entity that operates as a business that primarily aims to generate a profit for its owners or shareholders.
However, even these non-profit organizations must earn a financial surplus from their business in order to continue operating. The difference is that the financial surplus is reinvested back in the social enterprise and/or the community, rather than it being distributed to the owners (or shareholders) of the business.
Recall that social enterprises generate revenue like any business organization, but hold community objectives for the wellbeing of others in society, rather than primarily aiming to earn profit for their owners. Non-profit social enterprises operate in a commercial-like way but they do not distribute any profits or financial surplus to their owners or shareholders. Instead, the surplus they may earn is completely reinvested in the organization in order to pursue their vision and/or mission. Two examples include:
Kiva - An international company that operates in more than 80 countries around the world with the mission to expand financial access to help underserved communities thrive. This helps students to pay for their education, women to start their own businesses, farmers to invest in capital equipment, and families to afford emergency healthcare.
Malala Fund - This social enterprise was established by Malala and Ziauddin Yousafzai in 2013 to help empower women and girls by advocating and spreading access to education (by providing 12 years of free, safe, quality education and campaigning for gender equality). The Malala Fund is a registered charity in the UK.
Social enterprises are an example of social purpose organizations (SPOs) that aim to primarily provide a solution to important social or environmental issues, and not only commercial gains for its owners. Irrespective of whether they are for-profit or non-profit, all social enterprises leverage their ability to connect the work carried out by employees with a social goal. This provides employees with a sense of social purpose and the feeling of being able to make a positive difference to the social cause.
Examples of non-profit social enterprises run as NGOs include the following organizations. For example, Doctors Without Borders is an international humanitarian medical NGO, free from direct control of any local or national government.
Advantages of non-profit social enterprises
The advantages of establishing a business as a non-profit social enterprise include the following points (which apply to both NGOs and charities):
Non-profit social enterprises exist for the benefit of local communities and societies. Examples include fundraising events and donations to meet social aims of a community.
Non-profit organizations, including non-profit social enterprises, are exempt from paying corporate and profits taxes.
Many NPOs also qualify for government assistance in the form of grants and/or subsidies, thereby reducing their costs of production.
There can be a positive impact on employees and donors who feel that the non-profit enterprise is pursuing a socially meaningful ambition.
Disadvantages of non-profit social enterprises
However, there are potential disadvantages of establishing businesses as non-profit social enterprises. These include the following points (which apply to both NGOs and charities):
There are strict guidelines and restrictions that non-profit social enterprises must follow; not all trading activities are permitted. This is to ensure the general public is protected against fraudulent activities by dishonest charities or non-governmental organizations.
NPOs depend on the goodwill of the general public and donors to fund their operations. As a result, business survival is often difficult for many smaller, less-known non-profit social enterprises.
There is a lack of financial and cost control because, unlike in a for-profit organization, managers at NPOs are not expected to earn a profit for their owners or shareholders.
As a non-profit organization, the wages and remuneration of workers are often lower than in commercial, for-profit organizations. Whilst it might be socially acceptable that the managers at a bank or private law firm is paid an annual bonus, gets to travel on business class and is offered a company car, the equivalent benefits for a person working for a charity might be deemed to be rather unethical.
Company cars are a common perk for senior managers working in for-profit organizations
Top tip!
Although NGOs are not-for-profit social enterprises, this does not mean that they do not aim to make a financial surplus. However, the surplus is not treated as ‘profit’ for tax purposes simply because it does not get distributed to the owners or taxed by the government, but is reinvested in the charity.
Top tip!
Remember that social enterprises (be they for-profit or not-for-profit are businesses with primarily social rather than commercial objectives. Any financial surplus is principally reinvested for that social purpose instead of being distributed to the organization's shareholders or owners.
Greenpeace is an example of an NGO
A non-governmental organization (NGO) is a type of non-profit social enterprise that operates in the private sector of the economy. Therefore, it is not part of a government organization. Instead, it is operated a voluntary group to promote a social cause, such as the protection of human and animal rights, protection of the environment, and development aid. They operate at a local, national, or international level and put pressure on governments to adopt policies in support of their social cause.
They are usually funded by a combination of sources:
Government grants or donations
International organizations
Charitable organizations
Commercial businesses, as part of their corporate social responsibilities (CSR), and
Private donors and philanthropists.
Examples of non-governmental organizations include: Oxfam, the Wikimedia Foundation, Amnesty International, Doctors Without Borders, the World Wildlife Fund, and World Vision International.
ATL Activity 1 (Research skills) - Investigating NGOs
Research a non-government organization (NGO) of your choice, such as one of the ones mentioned above. Investigate the following for your chosen organization:
Its mission and/or vision statement
Its organizational structure
The number of employees
How it is financed
Its underlying purpose - essentially, the social or community benefits associated with the NGO
A good starting point might be the NGO Advisor website, which can be found here.
Be prepared to share your findings, which could form part of a Paper 3 assessment task.
Top tip!
Note that charities are not in the IB syllabus (although they are a type of non-profit social enterprise). Make sure you are aware of the difference between charities and NGOs. Whilst both are non-profit organizations (NPOs), not all NPOs are charities. To be a deemed as a charity, an organization must be registered with a respective Charity Commission. This is why organizations can be charities in some countries (such as Oxfam and VSO in the UK) yet be NGOs in other countries.
Top tip!
There is no universally accepted legal definition of an NGO and a charity; the meaning will differ from country to country. The IBO, for example, is a non-profit organization with charitable status - it is registered with the Charitable Commission in the UK as charitable company. Many private fee-paying international schools also operate in this way.
However, some differences between NGOs and charities may include:
Non-governmental organizations are completely independent of government control. Charities can operate in the public sector, i.e., they are run and operated by the government or public sector agencies.
NGOs can operate at the community, national, or international level for a range of social or political reasons, including humanitarian causes, protection of the environment, and the conservation of wildlife. Charities tend operate on a smaller scale with a specific focus, such as developing the arts, helping people with illnesses such as sight or hearing impairments, relieving homelessness, or other publicly beneficial actions.
Furthermore, NGOs generally lobby governments for desired change or a community goal, such as environmental protection, whereas charities do not tend to get involved in politics or lobbying of governments.
Read more about charities by clicking the icon below.
Charities (as non-profit social enterprises)
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Charities are a type of not-for-profit social enterprise. They operate to serve a humanitarian purpose, rather than to pursue a financial return for their owners. Charities exist to help a large range of causes, such as the pursuit of poverty eradication, human rights, child protection, and safeguarding the welfare of animals. Unlike traditional (commercial) businesses, charities do not necessarily sell any goods, but promote and a socially desired cause. Like other types of social enterprises, charities generally operate in the private sector.
To qualify and be registered as a charity, the activities of the organization must be deemed charitable by the laws of the country. It must only have charitable purposes for the benefit of the general public. This also means that charities have to produce annual reports to show how they are meeting their charitable objectives.
Examples of charities include the following:
However, as charities do not earn a financial return for their investors, they usually struggle with a rather limited range of sources of finance. These sources include:
Donations
Sponsorship funds
Fund-raising
Selling merchandise products.
Donations are a key source of finance for charities
Watch this short video clip from the The Australian Charities and Not-for-profits Commission, which outlines the definition of charities and their purpose:
ATL Activity 2 (Research skills)
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Coffee farmers in Ethiopia
Read this informative article here, to find out about promoting social entrepreneurship, using Reach for Change in Ethiopia as a case study.
| (a) | Define the term non-profit organization (NPO). | [2 marks] |
| (b) | Distinguish between a non-profit social enterprise and a for-profit organization. | [4 marks] |
| (c) | Explain two objectives of non-profit social enterprises. | [4 marks] |
Teacher only box(a) Define the term non-profit organization (NPO). [2 marks]
A non-profit organization (NPO), such as the International Baccalaureate, is one that reuses any financial surplus to achieve its organizational goals, rather than distributing the surplus (profit) as dividends to its owners. Although an NPO can generate a financial surplus, this must be kept within the organization for its self-preservation or expansion. Technically, "profit" belongs to the owners of a business, whereas "surplus" is reinvested back into the business.
Award [1 mark] for a description that shows some understanding of a ‘non-profit organization’.
Award [2 marks] for a definition with a clear understanding of a ‘non-profit organization’, similar to the example above.
(b) Distinguish between a non-profit social enterprise and a for-profit organization. [4 marks]
A for-profit organization is a business that is run primarily to earn a profit, with any financial surplus used to further its organizational objectives. They are held accountable to the owners of the business (shareholders in the case of privately and publicly held companies).
By contrast, a non-profit social enterprise operates with the purpose of a community or social cause, whilst using traditional commercial practices. The key difference is that the core business of a for-profit organization is for self-interest, whereas the core business of a non-profit social enterprise is for social-interest (the benefit of others in society). In the latter case, any financial surplus would not get distributed to the owners/shareholders of the organization.
Award [1 - 2 marks] for an answer that shows some understanding of the difference between the two types of organizations.
Award [3 - 4 marks] for an answer that shows a good understanding of the difference between the two types of organizations, similar to the example above.
(c) Explain two objectives of non-profit social enterprises. [4 marks]
Possible objectives of non-profit enterprises could include an explanation of:
Social objectives, i.e., improving social welfare of local communities and societies as a whole.
Environmental objectives, i.e., environmental and ecological protection (promoting sustainability).
Accept any other relevant approach that demonstrated an understanding of the demands of the question.
Mark as a 2 + 2
For each objective, award [1 mark] for an appropriate response, and a further [1 mark] for a suitable explanation.
Return to the Unit 1.2 - Types of organizations homepage
Return to the Unit 1 - Introduction to Business Management homepage
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