Coupon Accepted Successfully!

Social Entrepreneurship and Non-Profit Ventures

Creation and operation of non-profit trusts, societies under Section 8 of (earlier Section 25) Companies Act, and knowledge about operations of these structures can be very useful while engaging in all sorts of businesses and tax planning activities. Expertise on these matters is not at all common in the Indian legal market.
Introduction to Social Entrepreneurship and Non-Profit Ventures

Starting a non-profit venture gives one the sense of contribution to society and of working for public good. Non-profit ventures are undertaken through specific forms of business structures which are eligible for significant tax benefits offered to non-profit organizations (Part II of this write up discusses tax benefits for non-profits briefly). Contrary to popular perception, starting a social or charitable venture does not necessarily imply that the entrepreneur will not be able to remunerate himself for his effort. By way of example, India has thousands of private educational institutions that are structured as non-profit making trusts, which are now enriched with accumulated funds. The founders and managers of such institutions are often very well rewarded by their ventures. This module covers legal structures for social entrepreneurship and non-profit making ventures, tax breaks and the manner in which they can be incorporated.
  1. Are social entrepreneurship ventures the same as non-profit ventures?
‘Social entrepreneurship’ is a popular term amongst entrepreneurs these days. Social entrepreneurs are individuals with innovative solutions to pressing social problems (see the link for more details).  Social entrepreneurship can include "not-for profit" ventures as well as "for-profit" business ventures which serve social purposes. Some of the social entrepreneurship ventures are guided by profit motives; these concerns distribute profits amongst the stakeholders/investors, although the venture may be providing a much needed service that is essential for social development or public convenience. On the other hand, there are a large number of social ventures which operate as non-profit making organizations which may still make profit from its operations or investments, but do not distribute any of its profits to stakeholders such as partners or shareholders or investors.

One major attractive feature of starting such an organization is that their income and accruals may be tax-free or subject to taxation related incentives (see J. Gregory Dees, The Meaning of Social Entrepreneurship)

This part will discuss the legal functioning of non-profit ventures in detail. The learning objective will be to identify the various structures used by not for profit organizations (for profit structures would be just like any other company, partnership or LLP which have already been discussed before), various advantages and disadvantages of these structures and some operational and governance issues in administering those structures.

2. Profit making by non-profits

Non-profit organizations often generate significant revenue and funds and accumulate huge surpluses. For instance, trusts of temples such as the Siddhivinayak Temple, the Tirupati temple (which has funds of around INR 2000 crores) are some of the richest non-profit bodies which are extremely rich (Source) and accumulates funds through donations, operations and investments but they still qualify as non-profit organizations.

Similarly, if a company regularly makes losses while conducting business, it does not automatically qualify as a non-profit organization under law. For example, imagine that a power project for generating thermal power which was started with a capital of INR 1000 crore makes losses for its first ten years consecutively. That does not mean that the factory has become a non-profit venture.

When a venture is referred to as a non-profit venture, it usually implies that it is prohibited from distributing its profits out to its promoters or owners, and all its revenues must be applied towards promoting its objectives. For instance, a non-profit company or a society cannot pay dividends to its shareholders or members respectively, and it must apply its funds towards promotion of its stated objectives.
  1. How do non-profit ventures generate funds for operations?
An entrepreneur may have the desire to contribute to the society, even if he intends to make money in the process. In case he starts the venture with no selfish motive, it does not mean that his employees, labourers, and support staff must also work to serve the same social cause, without any remuneration for their services. An entrepreneur or his employees who are involved with a non-profit venture are not necessarily engaged in charity or social service. The prohibition is on distribution of profits towards those who provided the initial funds, but not on paying salary or management fee, or even on bearing various expenses of managers and employees related to the work.

Apart from the prohibition on distribution of profits, a non-profit organization is entitled to incur all other expenses just like a "for-profit" organization would– it can pay its employees, labourers, consultants, incur expenses towards rent, promotional activities, etc.
  1. How does a non-profit organization pay for its costs?
A non-profit venture can pay for its costs in three ways:

a) By generating revenues from its operations 
Generating revenues from operations is possible if the organization is providing products or services at a price, or if it has some investments which generate interest or returns.

b) By interest or dividend from investments
A non-profit venture may also generate revenues from investments. Non-profits often invest a portion of their corpus of donations or accumulated funds. Note that the investments must be made in accordance with the law and the bye-laws or rules applicable for the governance of the non-profit organization.

c) By raising funds through donations
Donations are a popular way of raising money for non-profits. Donations offer several tax benefits both for the donor and the recipient. These days, donations from foreign sources, called “foreign contributions” under Indian law, have become widespread. You will learn more about the law governing foreign contributions in Module III.
  1. How does an entrepreneur who is part of a non-profit organization receive compensation for his involvement?
An entrepreneur can perform his duties as an ‘employee’ or ‘consultant’ for the organization, and claim a ‘salary’ or ‘consultancy fee’ for his services. The prohibition usually is only on distribution of profits to members. The founder of a social enterprise cannot be entitled to a share of the profits as the owner of the organization.

In this course, we shall discuss the three most commonly chosen Non-profit structures, that is – Section 8 (Section 25 company under the Companies Act, 1956), Society and a public charitable trust.

Test Your Skills Now!
Take a Quiz now
Reviewer Name