Social enterprise as a means to reduce public sector deficits

Purpose – Charitable organizations have long been held out as separate from other human endeavors. One of the ways that this distinction has been maintained is through the use of a tax exemption. However, difficult economic times have caused state and local governments to search for additional revenues to make up for budget deficits. At the same time, there has been significant growth in the use of a new model for funding social missions as a social enterprise. While charity gets its operating income from grants and donations, this model uses commercial business activities as the funding for a social benefit, the purpose of this paper is to explore this model. Design/methodology/approach – This paper will provide a detailed review of the various reasons behind the tax exemption that nonprofits currently enjoy. It will then review alternatives that are available to government entities to address the desire to obtain additional revenue. Finally, it will examine the notion that a social enterprise may be a way to more equitably resolve these tensions and allow the delivery of desired social services to continue while helping to balance public budgets through both increases in tax revenue and reductions in government spending. In particular, it will examine a new legal structure that some social enterprises are employing. Findings – This paper will suggest that the L3C may be a way to not only further advance the ability of this social enterprise as a means to fund social missions, but may also serve as a way to reconcile the tension between society's desire to care for the less fortunate and relieve some of the pressure to reduce spending that federal, state and local governments are currently experiencing. Originality/value – Reducing or eliminating these tax breaks without a thoughtful plan for transition would also pose significant risk to the many fine social benefit programs currently being delivered by the traditional non‐profit sector. Nevertheless, the alternative offered by the L3C or some other new structure may allow for a reasonable compromise that eases the strain on public budgets without destroying the social support system that the non‐profit community provides.