Social enterprise – an easy way to replace lost funding by selling what your organization already knows how to do? No. A solution to your organizational problems? Don’t even think about it for that reason, says Centre for Social Innovation program manager Eli Malinsky. “If you already have a dysfunctional board, imagine what they’ll be like when they have to run a business as well.”

What are the right reasons for starting a social enterprise? Malinsky names three: market, mission and money.

A social enterprise may fill a need that the market will never meet on its own, such as creating employment for the marginalized.

It may provide a charity with a new opportunity to advance its mission. Malinsky’s organization furthers its mission by owning a 20,000 square-foot building housing 120 nonprofits and innovative small businesses and providing them with managerial, strategic and administrative services as needed.

And yes, provided it succeeds, a social enterprise can enhance an organization’s financial stability. Habitat for Humanity funds its operating costs by running Restores selling salvaged building materials.

Whatever the purpose, it had better be related

A few agencies such as Goodwill and the Salvation Army have operated social enterprises in some form for decades. But as a field, social enterprise is still new and evolving so rapidly that even its definition is fluid. Generally, it means a business operated by a nonprofit that produces or sells goods and services to generate income and achieve social and/or environmental aims. Other definitions would include cultural aims or community economic development. Some even include businesses with a social purpose such as for-profit green power producers.

To operate a social enterprise within your existing structure, you must meet the requirements of a “related business” under Canada Revenue Agency guidelines. Those guidelines say that the business must be linked to a charity’s purpose and subordinate to it, or that it must be run substantially by volunteers.

The Canadian Social Enterprise Guide (Enterprising Non-Profits Program, Vancouver, B.C., 2005) provides examples of businesses linked to a charity’s purpose. A hospital’s parking lot and cafeteria, a museum’s gift shop or a university bookstore all enhance the service that the charity delivers. A church selling recordings of its Christmas services is OK, since the recordings are a by-product of the charitable purpose of holding worship services. A charity can use its excess assets to earn income; a church might rent its parking spaces during the week, for instance. Selling products that promote the organization – anything from t-shirts to affinity credit cards – qualifies as well.

Beware of turning charity into business

The subordination of the business to your charity’s overall programs must be clear, says the guide. The business activity should receive only a minor portion of your charity’s resources and attention. It may not act independently but must be integrated into your overall operations. Your organization’s charitable goals must always drive your decision-making.

Finally, you must exclude any element of private benefit from the operations of the enterprise. You may not, for instance, maintain a different pay scale for enterprise staff or enter into relationships with for-profit firms that do not benefit your charitable purposes. You may not set up the business in response to an initiative, even a good one, generated outside the organization.

If your charity’s planned social enterprise looks like an unrelated business, there is still a way to mount it through making it a separately incorporated venture. Your charity may still continue to own and operate it.

Like any other initiative, a social enterprise requires a feasibility study and business plan before startup. The potential financial performance of the enterprise must be evaluated along with its potential social impact, since return on investment for a social enterprise is a blend of both financial and social performance.

When clients become staff, watch for cultural change

Be prepared for a culture shift too, Malinsky warns. If the enterprise creates employment for clients, what happens when those clients turn into colleagues? He cites the first year of one such enterprise where newly employed clients were hurt and indignant when they were not invited to the parent charity’s staff party.

Risk tolerance may have to change, along with the speed of decision-making. Board conflicts are likely too. Business people on the board may feel that the mission goals are too heavily weighted when outcomes are measured. Mission-driven directors may feel the same way about the financial goals.

Finally, Malinsky reminds us that “mission doesn’t sell product.” Don’t assume that your product or service will sell itself, even to existing supporters, just because of your mission and vision, he says. Make sure your product or service is at least equal to its profit-driven competitors.

Canada lags both the U.K. and the U.S. in development of social enterprise. While the concept is still relatively new here, help is available from Enterprising Non-Profits (enp) programs in Vancouver and Toronto and from some municipal United Way offices.