7.    Explore tax structures to enable new organizational forms.
In the early twentieth century, Congress created a variety of 501(c) tax categories, enabling the existence of nonprofit organizations exempt from some federal income taxes. The creation of this new organizational form, and the establishment of tax deductions to encourage donations to such organizations, set the stage for the development of a vibrant nonprofit sector, whose workforce now makes up 10.5 percent of U.S. jobs.

Today, as social entrepreneurs demonstrate successful solutions regardless of organizational form, they increasingly blur the lines between the nonprofit and for-profit sectors. New tax structures, leading to possible new organizational forms, could help to encourage social innovation, while lending confidence that could spur greater philanthropic, private, and public investment in the development of sustainable models.

One example is the for-profit organization Outside The Classroom, which seeks to reduce alcohol and drug abuse on college campuses through an innovative Web-based curriculum for college students. While the company has recently begun generating a profit, its start-up phase proved particularly challenging. The organization was started as a nonprofit, but found itself turned down by dozens of grant makers. It then decided to become a for-profit organization and find “patient capital” from socially motivated investors who were willing to wait for profits while the market was developed, or accept below-market returns, in exchange for social impact. A new tax structure—or revisiting of 501(c) guidelines—could make it easier to adopt the core characteristics of social entrepreneurship and support companies like Outside The Classroom, which fit somewhere between traditional nonprofits and traditional businesses.


Model:  North Carolina’s Low-Profit, Limited Liability Company (L3C)
In the 2007 session, North Carolina State Senator Jim Jacumin introduced the “Endangered Manufacturing and Jobs Act,” in an attempt to support North Carolina’s furniture industry, which has suffered in recent years as a result of global competition. A key element of the bill is the creation of a new organizational identity, the Low-Profit Limited Liability Partnership Company (L3C).  L3Cs could generate modest profit, while pursuing charitable or educational aims. The new tax structure would make it much easier for foundations to make use of a little-used but already established vehicle—called Program-Related Investments (PRIs)—to invest in for-profit initiatives aimed at addressing social problems. In the case of North Carolina’s furniture industry, the existence of an L3C structure would greatly simplify the process of accepting philanthropic funds to aid in the purchase and revitalization of the state’s ailing furniture factories.

Robert M. Lang, Jr., chief executive of the Mary Elizabeth & Gordon B. Mannweiler Foundation, which developed the idea for the L3C structure, says that the idea is taking off in other states as well: “Vermont’s House of Representatives has passed a bill that would create the new designation, pending approval by the state senate. Backers are also trying to get legislation passed in Georgia, Michigan, Montana, and North Carolina.” (UPDATE: this legislation has passed in Vermont. Click here to learn more.)

5.    Educate all 3 sectors in social entrepreneurship’s new approach to social problem solving.
Social entrepreneurship provides not only new ways of addressing persistent social problems, but also news ways of thinking about them. Government leaders can play a crucial role in educating the public, private, and nonprofit sectors in how to begin tackling social problem solving from this new, business-oriented perspective that prioritizes cost-effective and results-driven solutions.

Model:  The Phoenix Project   
Leaders of Virginia’s public, private, and nonprofit sectors have joined forces to form the Phoenix Project, a statewide effort to accelerate social entrepreneurship in Virginia as a way of battling poverty and other pressing social challenges. The effort has involved Governor Tim Kaine, former Governor Mark Warner, Lieutenant Governor Bill Bolling, and other elected officials in educating leaders in all three sectors in the new way of thinking that social entrepreneurship brings to social problem solving. The presence of high-level government officials as spokespeople has drawn to the effort private and nonprofit sector CEOs, as well as leaders from 40 Virginia universities, to pursue the Phoenix Project’s four-part strategy: (1) convene statewide discussions to educate and network leaders interested in social entrepreneurship; (2) engage public leaders as guest lecturers in an annual six-week social entrepreneurship academic and experiential program for thirty top undergraduate and graduate students drawn from throughout the Commonwealth; (3) create partnerships between consortia of universities and economically distressed communities to provide the context for launching and refining social enterprise solutions; and (4) forge a statewide agenda for accelerating social entrepreneurship with specific roles for leaders of each sector. According to the Phoenix Project’s Founder Greg Werkheiser, “With the visible involvement of our government leaders, we are creating the conditions necessary to make Virginia a destination for social entrepreneurship and for effective solutions to the problem of poverty.”

Learn more about the Phoenix Project and its approach to spurring social entrepreneurship in Virginia.

3.    Convene the public, private, and nonprofit sectors on critical social issues to advance solutions.
Government has the unique ability to convene the necessary stakeholders in order to address a particular social issue.  By gathering the key players from all sectors, public officials can lead the process of agreeing on the root causes of the social problem, plotting out a course of action for addressing it, and advancing solutions.

Model: The California Rural Economic Health Vitality Project
In 2005, Governor Arnold Schwarzenegger and his cabinet joined the California Center for Regional Leadership in hosting a statewide planning process called the Rural Economic Vitality Project. Through a series of regional and statewide planning meetings, the project brought together the key stakeholders from all three sectors to develop an agenda for spurring economic growth in California’s rural communities. Convening the necessary mix of leaders from all sectors to understand the challenges faced by California’s rural communities and identify actions for addressing them proved to be a major breakthrough. The Governor and the California Center for Regional Leadership were able to develop a Rural and Economic Health Vitality Policy Agenda with specific recommendations that are now being implemented.

4.    Develop awards programs to recognize and reward innovative, effective, and sustainable solutions.
Establishing government award programs to recognize success in social entrepreneurship would identify and support successful approaches. Such support could take the form of publicity, training, networking opportunities, and funding, and it would help to accelerate the progress of social entrepreneurs who are achieving exceptional results. A number of philanthropies, academic institutions, and media organizations—including Ashoka, Echoing Green, Fast Company Magazine, Harvard’s Kennedy School of Government, The Manhattan Institute, Schwab Foundation, Skoll Foundation, and the Social Innovation Forum—are already sponsoring awards programs that could serve as models for government.

Model: Social Innovation Forum
In the nonprofit sector, Root Cause’s Social Innovation Forum, which operates in Boston, provides an example of a competitive selection process that rewards proven solutions by connecting them to resources.  Each year, the Social Innovation Forum partners with local foundations and corporations to identify “Social Innovators” who are demonstrating promising approaches to addressing specific social problems in greater Boston. The organization provides these Social Innovators with strategy consulting, executive coaching from private sector leaders who volunteer their time, and introductions to a local Social Impact Investment Community made up of government leaders, foundations, and individual donors who are willing to offer time, talent, relationships, and money. Since 2003, the organization has identified and directed more than $2 million in resources to innovative, results-oriented organizations working in such areas as domestic violence, workforce development, youth development, and the environment.