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The question

We are a small non-profit organization with few funding sources, but recently one of our members developed a marketable product that would help boost our revenue stream. Should we take on this project within the existing organization, or start a second social-enterprise company for it?

The answer

For Canada's 180,000 not-for-profit groups, competition is tight for scarce funding from individual and corporate donors, foundations and governments.

So a social enterprise – a business with a social or philanthropic mission in addition to (or instead of) profit – expands the pool of donors. These people may have reached their personal limit of charitable giving but can still contribute to a cause by buying a socially conscious version of a product or service they would have otherwise bought with no positive social impact.

For instance, Eva's Phoenix is a transitional housing and training facility for at-risk youth in Toronto. Its in-house commercial print shop trains resident youth in design and other facets of the industry – serving clients that include Bombardier, TD Bank and Toronto Hydro with the full gamut of printing services – and channels all of its surplus back into the charity's other programming.

Atira Women's Resource Society in Vancouver developed an expertise in property administration through managing their shelter programs, so they launched the for-profit company Atira Property Management. It serves a wide range of private clients from housing co-ops to big developers, but it hires mostly women with barriers to employment and directs its profits back to the charity's programs.

There are significant practical and legal issues to consider when deciding whether to start a social enterprise within an existing organizational structure, to create a separate for-profit corporation, or to forget the whole idea.

The practical rule of thumb should be to do no harm to the original organization's work.

If your business idea strays too far from your organization's mission, or distracts time and attention away from its goals, establishing a stand-alone entity with separate structures, board of directors and staff is a smarter move than keeping it in-house.

Financially, a separate, for-profit corporation will be more flexible in its ability to raise capital, take on debt and enter into long-term contracts that would be unacceptable risks to the budgetary health of the charity.

The first step on the legal side, according to Stacey Corriveau, executive director of the British Columbia Centre for Social Enterprise, is to understand that there are different rules for non-profits, depending on whether they do or do not have charitable status.

Registered charities can operate "related businesses" within their existing structure that are "linked and subordinate" to their charitable objectives as registered with the government.

Non-profits without charitable status cannot indulge in any intentionally profitable activity – including markups on products or services offered. If caught, their tax-exempt status will be revoked.

The B.C. Centre for Social Enterprise has great online resources to help make sense of the legalese and tax issues, and it offers tailored advice on how to make sure an organization's social-enterprise plans comply with Canada Revenue Agency guidelines. You can also contact a qualified charity lawyer or the CRA directly for guidance and a written opinion on your specific case.

We also support the growing movement to create a distinct legal status for social enterprises, which would encourage more non-profits to make use of this innovative fundraising model, more entrepreneurs to incorporate the social good into their business strategies and more consumers to support them.

Craig and Marc Kielburger co-founded Free the Children.

Craig and Marc Kielburger co-founded Free the Children. Follow Craig at and @craigkielburger on Twitter. Send questions to .

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