Google.org seeks profits from charity work
By Tom Foremski - September 20, 2006
The New York Times has an article describing Google's charity: Google.org funded with $1bn. What makes this interesting is that its legal status is the same as that of a corporation--it is a for-profit entity rather than a non-profit.
This means that Google.org is not subject to the 501(c)(3) IRS code that restricts what a non-profit can do. A drawback is that it would pay taxes on revenues that would be exempt if it were a non-profit.
Another drawback is the general perception of for-profit versus non-profit organizations. Non-profit status carries a "saintly" aura in our society, while a "for-profit charity" sounds distasteful, it smacks of trying to make money from social causes.
Larry Brilliant, the head of Google.org said this for-profit issue was a problem for him when he was first offered the job.
. . . At first, Dr. Brilliant said, he was thrilled. But then he turned skeptical, largely because of the for-profit structure of the organization.
“I got weak knees,” he said. “It was weird. It was precedent setting.” After several lengthy conversations with executives at Google, Dr. Brilliant changed his mind.
Source: Philanthropy Google’s Way: Not the Usual - New York Times
What Google is trying to do is important because it tackles an important issue I've spoken about: why should a company or organization, whose charter is to develop useful social projects, be tied down by the restrictions of a non-profit?
A for-profit designation does not mean it has to make a profit. A for-profit corporation with a mission statement that is similar to that of a non-profit charity could gain many of the same tax benefits as a non-profit by simply controlling how much profit it makes.
But the public perception of a "for-profit charity" and the associated negative connotations are difficult to overcome.
A far better designation than "non-profit" would be: "not-for-loss." A not-for-loss company could execute on its social causes and be self-funded because its profits are reinvested.
Also, there would be no need to use up time and resources in raising money from donors, as is the case with many non-profit organizations.
A good example of a not-for-loss organization with a strong social charter is the Grameen Bank in Bangladesh. has been very successful in pulling tens of millions of people out of poverty through micro-loans.
The interest rate it charges is higher than from other banks; but this allows it to be self-financing, and to grow its social mission. It doesn't need to go cap-in-hand to the Bill Gates Foundation, or anywhere else, to ask for grants to continue its work.
Another important aspect of the Grameen Bank structure is that its customers are also shareholders.
This is something that Google.org should look into, because its funds and projects could be yanked in the future by Google management or shareholders. If Google.org partners/customers were also shareholders, it would protect it from potential problems.
One of the first projects that Google.org could fund would be to establish the legal structure that others could use to create not-for-loss organizations, in which customers are also shareholders.
The importance of such legal structures should not be underestimated.
We would not have open source software if it weren't for a very powerful legal document, the GPL. This is the license that protects open source software; and it has never been challenged in the courts.
The GPL provides a legal structure that makes it possible for communities of developers to create commonly-owned open source technologies--and be protected from costly intellectual property lawsuits.
Google.org could help create not-for-loss legal structure for organizations with a social mission, the equivalent of a GPL, available in the public domain. That would create a tremendous amount of social value, IMHO.
By Tom Foremski - September 20, 2006 | Permalink | Comment
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Comments (2)
Your point about creating for-profit "mission-driven" organizations is intriguing and worth thinking about more deeply. Are you (a) encouraging more ventures similar to Google.org, or (b) proposing creating a new, hybrid third category of corporations that possesses attributes of both for-profit and nonprofit companies? Different issues arise in either case.
If (a), then corporate donors must consider whether donating/investing to the entity violates their duties to shareholders. In the case of Google Corp, executive Sheryl Sandberg notes that potential investors knew beforehand that Google intended to contribute 1% of profits and equity to charity. This "donation" is really an investment and therefore is not tax-deductible. The for-profit Google.org has none of the restrictions imposed on nonprofits, but the entity's income is taxable. Since Google Corp is the only investor/shareholder in Google.org at this point, .org's income and tax liability matter only to Corp. Outside of these unique circumstances, it would be challenging to establish another Google.org-type entity.
The issue in considering whether to advocate a new hybrid corporate form is, compared to existing "for-profit" and "nonprofit" categories, what constraints are you trying to avoid and what benefits are you trying to obtain? Possibilities:
1) Broader purposes than the IRS currently permits (charitable, educational, religious or scientific purposes).
2) Exemption from taxes for all income that is recyled into exempt purposes.
3) Allowing "shareholders" to redeem their capital with some return (e.g., capped at CPI). This is tricky if the shareholders also want their initial capital donations to be deductible.
4) Exemption from lobbying restrictions.
5) No disclosure of the org'ns tax returns.
6) No minimum annual investment into program-related activities.
Are there other corporate powers that should be considered?
P.S. The Grameen Bank is a wonderful, pioneering organization. However, although I could be out-of-date, the Grameen Bank is not self-funding. It depends on donors to provide enormous amounts of capital for its growth and sustainability.
Posted: September 26, 2006 7:37 AM
Cliff, you raise some excellent points in regards to creating a new type of hybrid corporate entity with different taxation. But I'm not sure it is needed. A solid legal structure in which customers are also shareholders, combined with "not for loss" social-mission-driven goals could achieve a lot under the present taxation rules, and also be able to moderate tax payments. We have many examples of some of Silicon Valley's largest companies being able to significantly reduce their tax bills using current rules. Also, paying taxes is not a bad thing, part of the money goes to support local communities.
Posted: September 26, 2006 1:47 PM