Fellow changemakers and pioneering impact creators often face the challenge of choosing the appropriate legal foundation to start and grow their social enterprise with a clear mission.
In this article, we won’t dive into every possibility, so for any tailored legal advice, please consult an attorney in your jurisdiction. We will explore some entity choices and highlight key considerations for finding the right legal structure that balances profit and purpose.
- The Hybrid Nonprofit For-Profit: A Powerful Combination for Social Enterprise Success
- The Trailblazing Common For-Profit Corporation or LLC: Demonstrating Social Enterprise Status
- Unincorporated Business Associations: Considerations for Small and Closely Held Social Enterprises
- The Purpose Driven Duo: Benefit Corporation and Social Purpose Corporation
When establishing a social enterprise, one option to consider is the hybrid model, which involves a nonprofit corporation that owns a subsidiary for-profit entity. The nonprofit can apply for tax-exempt status under Section 501(c)(3) of the Internal Revenue Code, while the for-profit subsidiary generates profits to support the nonprofit’s mission. Additionally, the hybrid model can help attract investments from mission-aligned investors, further fuelling the social impact. While it seems like you can have your cake and eat it too, a hybrid model requires twice the operational costs to run two organizations, such as separate financials and business expenses. Business transactions between the two must be fair and at arm’s length.
Another viable option is to establish a traditional for-profit corporation or limited liability company (LLC) and signal its social enterprise status through third-party certifications like a B-corp certification. These certifications verify the company’s commitment to responsible business practices, transparency, and legal accountability in pursuing both profit and purpose. However, it’s important to note that relying solely on certifications may not fully embed the mission into the company’s governance structure, potentially impacting decision-making when mission and profit interests are not aligned.
LLCs offer more flexibility in their management structure. Founders can incorporate the mission and self-imposed accountability measures into the operating agreement. While flexible, not all investors would invest in an LLC and operating agreements can change upon agreement of the requisite authority.
For small and closely held social enterprises, unincorporated business associations such as sole proprietorships and general partnerships can be an option. The individuals can structure the agreement among themselves to include social impact goals as they see fit. However, it’s crucial to be aware that these structures lack limited liability protection, exposing the individuals involved to increased risks. Additionally, scaling up operations can be challenging without the formalities and legal protections provided by incorporated entities.
Designed specifically for purpose-driven enterprises, benefit corporations and social purpose corporations offer a haven for those seeking to combine profit and impact. These entity types provide legal protection for directors’ decisions aligned with the mission, embed values into the company’s structure, and make it easier to attract mission-aligned investors. However, they may come with additional requirements, such as the preparation of an annual report and increased accountability.
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Conclusion:
Choosing the right legal structure for your social enterprise is a crucial step in balancing profit generation with societal betterment. Each entity form has its own nuances and considerations. Whether you opt for a hybrid model, a certified for-profit entity, an unincorporated association, a purpose-driven corporation, or other models, it’s essential to align the legal structure with your mission and long-term goals. By making an informed decision, you can create a lasting legacy that combines profits and purpose, driving positive change in the world.
