The Mandate of Charitable Organizations to Engage in Businesses as Income Generation Activity: Theories, International Experiences and Ethiopian Law

Abstract

The engagement of charitable organizations in business, as income
generating activity, is a contentious subject. Those supporting charity trading
see it as a venue of financial support for the missions of charities while
others are against this move arguing that charity trading will degrade the
defining virtues of charities – namely, that they operate outside of the forprofit
marketplace. Theoretically, there are different lines of thought with
regards to charity trading such as exclusivity doctrine, the doctrine of
primary purpose trading, doctrine of ancillary trading, and the doctrine of
non-primary purpose or unrelated trading. Countries adopt one or two of
these theories and largely they view income generation activities from
different perspectives– its relation with the primary purpose of the charity,
asset protection of charities (the risk of business failure), and its effect on
market competition. The Organization of Civil Societies Proclamation (OCS)
of Ethiopia allows charities to engage in any lawful business activity without
a condition of the element of relatedness to the mission of the charity and
other concerns. Generally, there are doubts about the legitimacy and extent
of engagement of charities in business. This article examines whether and to
what extent, charities shall be allowed to engage in business activities.
Following doctrinal research methodology, the article critically examined
the theories, international practices, empirical evidences and legislations of
non-profit organizations. Based on the analysis made the article concludes
that as charities are inherently formed to pursue charitable purposes and
since business activities as a secondary mission may distract them away from
their central missions, their engagement in trade activities shall be limited
only to charity purpose-related trading. Thus, the OCS law of Ethiopia needs
to be re-visited in light of the foundational theories of the non-profit sector
and major international experiences.