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Q1. Describe the major and minor pitfalls for nonprofits embarking on for-profit endeavors. How might mission, message, personnel, image, and organizational structure be affected by such an endeavor? Why should these considerations be discussed before embarking such a move?
Despite their designation as a nonprofit, many such altruistic organizations have sought out ways to finance their operations using for-profit endeavors. The reason for creating a for-profit subsidiary is relatively straightforward—it can be a more stable and sustainable source of donations. For example, “a not-for-profit health maintenance organization (HMO) creates a for-profit subsidiary to offer health insurance unavailable through HMOs” or “a university business school starts a venture capital company to fund worthy startups and give students a first-hand look at what makes businesses tick” (“The Lure of the Nonprofit Subsidy,” 2017, par.1). In the wake of the 2008 recession, such endeavors became more and more popular, as organizations sought to make up for the loss of revenue due to the downturn in the stock market and the fact that many donors no longer had the funds to keep charitable organizations solvent.
The problem, however, is that for-profit entities are primarily designed...
For example, a nonprofit dedicated to helping the environment might find that its for-profit endeavor is able to turn a profit because of using non-environmentally sound production strategies to generate its product. This can discourage donations and result in negative publicity.
There is also the ethical question in and of itself of encouraging people to buy a product or a service with an awareness that the funds are supporting a nonprofit. Even though some of the money may go back to the parent organization, the for-profit venture must still pay its commitment to shareholders, financers, and others that undertook the mission out of the interest in profit-making, not charity. Similarly, personnel who work for the organization may be less apt to prioritize ethics or the goals of the charity because their ultimate ethical obligation is to the for-profit endeavor. This can cause a conflict of mission as well as confusion in the organizational structure, given it is uncertain to whom certain personnel are held ethically accountable, either the individuals working on the nonprofit or the parent organization.
Legally speaking, there must be…
References
The lure of the for-profit subsidy. (2017). Maxwell Locke & Ritter. Retrieved from: https://www.mlrpc.com/articles/lure-profit-subsidiary/
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