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The Evolution of Nonprofit Finance in the United States: Earned Income, Enterprise Strategies and Social Enterprise

charityThe United States has a rich history of nurturing nonprofits and thus has a nonprofit sector that is among the most dynamic and wide-ranging in the world, both in terms of the number of nonprofits and their impact on society. Certainly governing structures, such as tax advantages and contracting, have been very important in sustaining this sector.

For many reasons, ranging from tightening government budgets to enhanced accountability in the sector, nonprofits began to get squeezed financially, a slow trend that took shape in the 1980s. Nonprofits began to focus more on creative financing during this time period, which took many forms, but generally fell under the umbrella of enterprise strategies. The line between the nonprofit sector and the traditional corporate sector became increasingly blurred. At the same time, the new public management trend in public administration, which called for more accountability, bled over to the nonprofit sector. The foundation sector also focused more on accountability, in the form of performance measurement and evaluation, and the notion of “venture philanthropy” emerged. Some began to question whether the traditional notion of nonprofits as a collaborative network had shifted to a competitive marketplace perspective. Successful nonprofits have had to conform to these developments, which continue unabated.

Perhaps the culmination of these trends, in the area of social change, has been the social enterprise. Although distinguishing a traditional nonprofit from a social enterprise is inexact and unresolved, many authors, including Dees, Emerson, and Economy in their 2001 book, Enterprising Nonprofits, A Toolkit for Social Entrepreneurs (John Wiley and Sons), refer to the double bottom line of social enterprises, which is linked to the following characteristics: 1) A social mission, and 2) earned income strategies. This second characteristic is the real distinguishing factor, and may or may not be present in a nonprofit organization.

Social enterprises typically will blend philanthropic methods with the trade of goods or services in a market in order to achieve their social mission. While it is certainly true that nonprofits have trended in this direction, earning income from many sources, such as fees for services, government contracts and even sales of goods and services, this has not typically been their exclusive source of income. A social enterprise, on the other hand, exists within the market-driven economy by design, perhaps having been initiated by a social entrepreneur. It looks and acts like a profit-driven business, except the profits support the social mission. The fact that nonprofits are increasingly entrepreneurial further complicates the distinction. A social enterprise does not have to be incorporated as a nonprofit, however, and may take many organizational forms.

Social enterprises are appealing to partisans of both stripes and to pubic administrators. Conservatives tend to favor them over traditional nonprofits because they exist within the marketplace. Thus, their product determines their success. They are not dependent on government revenues for survival. Liberals are drawn to social enterprise because they represent a creative attempt to address social problems, and in the era of tightening budgets they can be an important supplement to direct intervention by government. Public administrators tend to appreciate the quasi public services that social enterprises deliver. Grants to social enterprises become akin to seed money, and administrators generally welcome the movement toward self-sufficiency.

How then can government facilitate and hasten the creation and spread of social enterprises? While the U.S. has been evolving toward social enterprise slowly, Doherty and his coauthors in their 2009 book, Management for Social Enterprise (Sage), report that many other industrialized countries, primarily in the European Union, have been more nurturing of this organizational form. Clearly, in the U.S., additional support structures need to be created and nurtured so that social enterprises can flourish and expand. Just as governments supported the growth of the nonprofit sector, they can do more to support the growth of social enterprise. The following are some possible initiatives that governments and their representatives can take:


Public administrators can:

  • Design grant evaluation mechanisms to favor social enterprises, which may or may not be linked to specific social problems.
  • Provide support and advice for these organizations.
  • Create partnerships to achieve social goals.
  • Identify jurisdiction-specific growth barriers and work to resolve them.
  • Work with universities to create programs and curricula specific to social enterprise and social entrepreneurship training.


The larger political system can:

  • Create and refine legal structures that clarify the organizational form and do not penalize the organization for sales of goods and services, as long as the profits go to the mission. The relatively recent distinction, the low-profit limited liability company (L3C), that many states have adopted or are considering, is an important step in this direction.
  • Initiate state and local “economic development” strategies, which have generally been used for private business development. These include tax related incentives and credits, which could include tax increment financing, but also seed grants, capital financing assistance (e.g., direct loans, interest support structures, and bank partnerships) and funding of “incubators” that provide assistance to social entrepreneurs.


Social enterprise holds a lot of promise and will certainly continue to grow as a way to resolve lingering social problems. If governments take a more active role in supporting and embracing these types of organizations, as they have with traditional nonprofits, they will spread and become increasingly common in the United States.


Author: Jason L. Jensen, Ph.D., is an associate professor and the MBA director for the College of Business and Public Administration at the University of North Dakota. Jensen also directs UND’s social entrepreneurship graduate certificate program.


Image courtesy of http://www.business2community.com/finance/the-benefits-of-a-company-making-charitable-donations-0338130.


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The American Society for Public Administration is the largest and most prominent professional association for public administration. It is dedicated to advancing the art, science, teaching and practice of public and non-profit administration.

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