In the modern, purpose-focused world, traditional boundaries between doing good and doing business are becoming less clear. Organizations are not evaluated only based on profits but rather how much of an impact they are having on society. In this new world, two models are quickly emerging as pathways of choice for creating change: nonprofits and social enterprises.
Both nonprofits and social enterprises aim to solve pressing social and environmental issues. However, they differ on a number of elements: the way they operate, their fundraising and earning strategies, their growth strategies, and how they define, measure, and report success. Understanding those differences is crucial for anyone contemplating the role of being a change agent, an investor, or as a donor wanting to learn more!
In this post, we will explore what the differences are between nonprofits and social enterprises, we will look behind the curtain at their legal and financial structures, we will outline some of their strengths and weaknesses, and we will help you determine which organization is best geared to support your mission.
What is a Non-Profit?
A non-profit is a mission-driven organization set up to serve a public or social benefit. It does not have any distribution of owners’ profits or dividends to stakeholders or shareholders, it reinvests all profits back into the mission. And of course, it will use public or private funds in the form of charitable donations, grants and volunteers.
What is a Social Enterprise?
A social enterprise is a business that applies market strategies to achieve a social or environmental goal. It sells goods or services to make money and reinvests the income to achieve social impact. Social enterprises may take the form of a for-profit business or organization, but they are designed to achieve impact goals.
Both nonprofits and social enterprises are committed to doing good, but they do so in different ways.
Historical Development
Nonprofits have a long history, dating back to charitable or societal traditions of religious institutions and formally via governmental recognition. Nonprofit structures did not fully take hold legally or in the form of tax status until the 20th century (LSE Public Policy Review). In the U.S. it was the introduction of 501(c)(3) nonprofit designation that prompted more structural work and helped organize acceptance of tax-deductible donations and the use of public money.
Social enterprises are a more current and dynamic development. They began emerging in the 1980s when examples began gaining traction, and they became progressively more defined through the 1990s. Early fabricators, like Muhammad Yunus (Grameen Bank) and John Elkington (Triple Bottom Line), rejected conventions and created their own ‘conceptualizations’ of combining financial and social value. The social enterprise model was shaped with the initial idea that opportunities were there to avoid the frustrations of dependency on donor funding and provide solutions that could be sustainable.
Today social entrepreneurship is alive and well. Years later, the social enterprise movement has gained traction and is attracting increased interest, support, and investment from financial investor communities, socially-minded consumers, and governments who are looking for innovative solutions for systemic issues.
Legal Structure and Format
To learn more about legal frameworks and certifications, check out B Lab’s guide to B Corps or IRS nonprofit requirements.
Nonprofits:
- Registered under a tax-exempt status (501(c)(3) in the U.S.)
- Cannot distribute profit or dividends to private individuals
- Must provide written reports to maintain tax-exempt status and public trust
Earned income (related to mission) must be not subject to a penalty (e.g. Unrelated Business Income Tax)
Social Enterprises:
- May be structured as for-profit businesses (LLC, corporation, etc.) / hybrids (B Corp, Community Interest Company in UK)
- Can distribute profit to shareholders
- Draw equity investment and returns
- May acquire certification by a third-party entity (e.g. B Lab) as a measure of their commitment to social impact goals
Legal structure defines critical elements associated with how money is raised, what kind of public disclosure will be required and what controls exist over the organization.
Funding and Revenue Models
The Stanford Social Innovation Review offers useful insights on earned income strategies for nonprofits and impact investment models for social enterprises.
Many nonprofits depend on:
- Individual donations (tax-deductible)
- Philanthropic grants
- Fundraising
- Federal/state subsidies and contracts
- Earned income (e.g. service fees, events) that relates to the mission
While nonprofits can support a huge range of causes, they often have a precarious funding situation caused by donor trends, grant cycles, and down economic times.
Social enterprises are funded primarily via:
- Sales of goods or services
- Contracts with businesses or government
- Impact investment
- Social venture capital
Since social enterprises work with a business model, they can be less vulnerable and more scalable. That said, it may not lend itself to missions that do not involve a product or service that can be sold.
Mission Priority and Profits
In a non-profit, the mission is the #1 (ometimes only) priority. Every decision needs to relate back to the public benefit. And any surplus must be put back into programs, staff, or infrastructure.
In a social enterprise, mission is still a priority, but there are also financial ambitions. Some social enterprises profit share with owners or investors, but many opt to re-invest the bulk of profits back to grow the impact of the social enterprise.
The introduction of profit motive is a source of tension. A social enterprise may prioritize profit above purpose if mission drift is not avoided. That is why many social enterprises have governance models (or certifications, such as B Corp) that hold them accountable.
Case Studies
- World Wildlife Fund (Nonprofit): One of the largest and influential conservation organizations in the world, WWF concentrates on maintaining the world’s oceans, protecting endangered species, and advocating against climate change. They operate as a traditional nonprofit that relies on donations, grants, and partnerships to cover costs in pursuit of their mission.
- Too Good To Go (Social Enterprise): An app-based social enterprise aimed at reducing food waste and encouraging consumer behavioral change by allowing consumers to purchase surplus food from restaurants or stores at a reduced fee. Too Good To Go operates as a for-profit social enterprise with an explicit environmental mission and reinvests profits to grow the business and increase public awareness.
- Old Skool Cafe (Hybrid): A hybrid nonprofit restaurant in San Francisco operated by at-risk youth. Old Skool Cafe generates revenue from its restaurant operations, but also operates as a nonprofit that is awarded donations and grants. Old Skool Café incorporates an earned income business model with philanthropic funding to support job training and youth empowerment services.
The examples offered in this case study demonstrate that mission-driven organizations can operate very differently as social enterprises and nonprofits and can thrive depending on how they approach funding, governance, and scale. In this sense, both types of organizations can define what it means to be scaling, innovating, and sustaining impact.
Strengths of Nonprofits:
- Access to philanthropic and government funding
- Strong public trust and donor reputation
- Clear governance focused entirely on mission
Weaknesses of Nonprofits:
- Dependence on unpredictable funding cycles
- Limited access to capital markets
- Slow scalability without reliable earned income
- Risk of mission sprawl when trying to satisfy diverse funder priorities
Strengths of Social Enterprises:
- Financially self-sustaining through earned income
- Potential to scale quickly
- Appeal to impact investors and entrepreneurial talent
- Natural focus and operational discipline (SSIR)
Weaknesses of Social Enterprises:
- Sometimes viewed with skepticism by traditional funders or nonprofit leader
- Risk of drifting away from the mission when profit becomes a priority
- Complexity in balancing financial and impact goals
Decision Framework: What Model Should You Choose?
Here are a few questions to consider:
- What problem are you trying to solve? If it is an urgent, systemic, or wicked problem (think homelessness or disaster relief) and may not be easily monetized, then a nonprofit organization may be the better option.
- Are you able to sell a product or service? If yes and it clearly supports your mission, then you might consider a social enterprise which will allow you to develop long-term sustainability.
- Who are your funders? If your organization receives funds from donors, foundations, or government agencies, then nonprofit status will allow you to have more options. However, if you need to receive equity investment, you may need a for-profit or hybrid structure.
- How important to you is operational flexibility Social enterprises generally have more operational flexibility. Conversely, non-profits, while less flexible on the operational front, are trusted by the general public.
Ultimately many founders end up going the hybrid route, creating both a for-profit and nonprofit organization to have a multitude of funding options as well as legal benefits associated with each structure.
Governance and Accountability
Nonprofits:
- Governed by board of directors or trustees
- Required to report their financials to regulators (e.g., IRS Form 990)
- Often scrutinized by watchdog and review organizations: Charity Navigator, Guidestar
Social Enterprises:
- Governed like traditional businesses
- Accountable to their investors, customers, and employees
- Can use third-party certification (e.g., B Lab) to help stakeholders trust their impact
In both cases, credibility is built through transparency, effective leadership, and measurable progress.
Blurring the Lines
Nonprofits and social enterprises are becoming less distinguishable as both sectors employ many of the same strategies. Many nonprofits are adopting revenue-generating programs, hiring business development consultants, and collaborating with private sector partners. In a similar vein, social enterprises are being transparent with their impact (with the same rigor of nonprofits), seeking B Corp or ESG certification, and re-investing profits in their communities.
We are in the middle of a period of convergence where the form of the organization is going to become less important than the strategy itself, and ‘success’ is measured by lives changed and not forms sent into the tax office.
Conclusion
Nonprofits and social enterprises represent two different pathways towards the same aim: a better world. Both nonprofit and for-profit organizations can achieve impact, innovation, and sustainable outcomes, but they do it differently.
If you are better serving your audiences through philanthropy, volunteerism, and public trust, then a nonprofit model may serve you better. If your mission has a large-scale manufacturing or earned-income component and your success can be opened up to entrepreneurial jeopardy, then you could pursue a social enterprise approach.
In all cases one structure isn’t any better than another. Only the structure which serves your mission, your audience, and your long-term goal. Make the choice, be transparent, act in service, and build something that lasts.