More Charities Face Legal Challenges over Social Enterprise Earned Income

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In the world of social enterprise, we often talk about ways that social businesses can use commercial business activity to become self-sustaining. What tends to get lost in the mix, however, is the fact that strategies for economic sustainability could lead to substantial legal difficulty.

A couple recent news stories highlight potential problems. Earlier this month a North Carolina court ruled that an organization exempt from U.S. federal income tax under Section 501(c)(3) of the tax code was nonetheless not exempt from state income tax. The reason: for purposes of state law, the organization was not charitable since it failed to charge fees below cost or market rates.

Tax news out of India is potentially even more troubling. A recent amendment to India's tax legislation refines the legal definition of "charitable purpose" to exclude "any activity in the nature of trade, commerce or business" or "any activity of rendering any service in relation to any trade, commerce or business" provided for a fee or other consideration, if that activity is associated with "the advancement of any other object of public utility" besides education, medical relief or relief of the poor.

The exceptions are crucial: charities dedicated to one of these three purposes can still use business to advance their cause without losing their tax exemption. However, any charity that does not fall within the ambit of the three excepted purposes listed above needs to pay attention to this change.

Beyond the particulars, what stories such as this underscore the importance of paying attention to how things seem outside social enterprise circles. What seems standard for us can render a social venture uncharitable in the eyes of the law. For social enterprise to thrive, we need to be able to explain to regulators--and the general public--why our business models serve the common good.