Is Nonprofit Finance An Oxymoron? (Part 2)

Foremost among the fundamental issues creating barriers to a functioning capital market in the nonprofit sector is the rigidity of the corporate structure. Either you are a nonprofit corporation or a for profit corporation and there is nothing in between -- in this country, that is.

If you are a for profit corporation trying to focus your assets and profits on doing socially beneficial things, you are always under pressure to justify not maximizing profits. And if an acquisition or IPO becomes possible, there is always the concern that the new owner will not have the same commitment to socially beneficial investments and activities.

If you are a nonprofit, funders expect you to spend every penny on program, and you face constant challenges if you are trying to build your infrastructure or expand your capital base. (See Part 1 of this post.)

In Britain, the government is experimenting with a new type of corporation called a community interest company (CIC), designed for "social enterprises that want to use their profits and assets for the public good," according to the CIC web site. The government wants to support the development of social enterprises, defined as businesses with primarily social objectives whose surpluses are principally reinvested for that purpose in the business or in the community, rather than being driven by the need to maximize profits.

This "modern and appropriate" legal vehicle is designed to allow corporations to raise a limited form of equity capital, and pay a preferred return, on a portion of the corporation's assets and profits. The fact that the assets are "locked" in the corporations ensures they remain dedicated to social benefit. The transparency in the reporting requirements is more reminiscent of their for profit counterparts.

As donors become more sophisticated in their charitable investments, our legal structures need to keep up.

Carla E. Dearing