Business Crossover

It is popular in Israel and around the world to speak of the crossover between nonprofits and business, but it is important to layout the different phrases and distinguish between the phrases themselves and also actual legal definitions.

On a scale with a normal business on the left and a normal nonprofit on the right, we have 7 forms. A normal business has no interest in the nonprofit world or social sphere. Then there are business corporations with a sense of responsibility, what is called these days ‘Corporate Social Responsibility’, and such a business will donate cash to social causes, or send their staff to volunteer, or rent space low-cost to nonprofits, or hire a number of individuals with special needs or circumstances of some sort. This category may also include collaboration between business corporations with government or public and social interests.

Another form, as we move right along the scale, is a business, legally and structurally, with a business model, yet the motive behind the investors was social, for example, a small business in a developing country or struggling community, and social interest groups help these get on their feet and operate as any business once they do so. [This is the classic Muhammad Yunus Grameen Bank concept.]

Here we might mention also cooperative community-based businesses, where there is no interest group besides the community enjoying the proceeds and benefits, such as a community center convenience store or service providing company.

Then there is the social business venture, which is a business, but the motive of the business is not profit, but a social benefit, and if profitable, the profits will go back into the business, or into other similar ventures. For example, a work space for mentally handicapped individuals. In Israel, the above forms are private companies legally, but the social business is a semi-legal form, defined not by the Corporations Authority at large but only the Registrar of Associations (nonprofits) itself, pertaining to business activity of a nonprofit that is part of their official objectives, or a daughter company of a nonprofit organization - only then will it be recognized as a social business by the Registrar of Associations, and receive attention as such, mostly for grants by external investors and government funding. In Israel and around the world however, the term social business is used for almost any crossover between business and the social sector or social causes.

Now we move into the sphere of actual nonprofit organizations, not private business companies technically, and we have two additional items to address, besides the normative nonprofit organization that raises funds from donors and uses the donations to fund its activities.

Nonprofits may and are actually encouraged to engage in what is legally coined secondary business activity. This mode of independent income means that an organization may register business activity with the VAT department, handle an additional receipt booklet that is not for donations but rather for business activity so it includes a tax invoice, and report the business activity annually in its reports. The legal requirement is to separate the business activity from the nonprofit activity, including resources and assets used for the different activities. Typical such secondary business activity is for example: a nonprofit institution with a coffee shop for visitors or passersby, an adjacent parking lot owned by the organization and part of its building, or use of professionals in the organization in their extra hours to utilize their skills and assets to business income, for example legal professionals helping a population whose rights are challenged, may sell their knowledge and skill to groups interested for whatever reason, and another simple example is an organization owning vehicles and other equipment to rent these assets during hours of inactivity. The criteria is also that this secondary business activity would not dominate the organization, by generating more than 50% of the organization’s income, and other vague criteria so that the government may decide that the organization is essentially a business and not a nonprofit.

Finally, another mode of independent income and perhaps the most interesting and cutting-edge form is the nonprofit organization engaging in an activity that generates income, but the income is neither business activity, which would involve VAT and tax invoices and such, nor is it donations, which would entail donation receipts and donor reports, for which a third type of receipt booklet is used - which is simply a receipt, not a receipt for donation, nor receipt with business tax invoice. Besides compensation expenses and membership fees, this third booklet is usually used for income from selling of services or products - but this does not count legally as business activity, because the nature of the activity is close enough in essence to the official objectives for the activity of the nonprofit organization. For example, an organization that helps victims of sexaul harrassment and also educates the public in this regard, can sell educational materials and seminars to schools and professional offices.

This does not count as business activity, but rather the nonprofit activity, yet it is not a donation. Some new organizations have developed an entire economic model based on this type of income, as opposed to the traditional philanthropic economic model of the nonprofit organization. It should be noted that this category includes ‘selling services’ to the government, in other words, not government grants but government bids to outsource services for implementation of policy. For example, an organization may operate a team of social workers, and the government will pay that nonprofit organization to attend to a social welfare need, or an environmental nonprofit organization will be paid by the Ministry of Environmental Protection to attend to an environmental protection matter.

Lastly, a phrase worth mentioning is ‘blended value’ or ‘double-bottom line’, which can refer to any of the above forms and activities, in the sense that there is a business or economic value as well as a social value to a one particular activity at the same time.

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