NEW LEGAL STRUCTURES FOR SOCIAL ENTREPRENEURS - socentlaw

NEW LEGAL STRUCTURES FOR SOCIAL ENTREPRENEURS

Originally posted in Wall Street Journal

BY: KYLE WESTAWAY

You may have noticed the emerging class of “social entrepreneurs” who are creating companies that seek profit but also are devoted to a social purpose, to create long term, sustainable value.

Social entrepreneurs believe a business can be a part of the solution to some of the world’s greatest challenges. It’s this kind of thinking that has given rise to such mission-driven companies as Better World BooksTOMS ShoesD-Light Design and Warby Parker, to name a few.

But, until recently, social entrepreneurs would find themselves in the position of choosing whether to organize either as a for-profit company or a nonprofit organization. The problem was that sometimes a company would be too much of a business to be a nonprofit. Yet, it also might be too mission-driven to be a for-profit.

Fortunately, there are a few innovative legal structures designed for entrepreneurs who are driven as much by mission as money. The cost of using one of these new legal structures will vary depending on lawyer fees, but generally those fees shouldn’t exceed more than $10,000 for a start-up with fewer than 10 employees.

Here’s an overview:

L3C

Ideal for: companies that want to blend traditional capital with “philanthropic” capital, such as from foundations

Available to start-ups in: Vermont, Michigan, Wyoming, Utah, Illinois, North Carolina, Louisiana, Maine and soon in Rhode Island.

The Low Profit Limited Liability Company is a new class of LLC for mission-driven companies.

An L3C offers the same liability protection and pass-through taxation as an LLC. But it must be organized primarily for a charitable purpose – and secondarily for profit. Unlike a traditional nonprofit, it may distribute its profits to owners.

The L3C is designed to attract both traditional investment and a very specific type of philanthropic money called Program Related Investments (PRI). PRI is capital – in the form of equity or debt – from a foundation to a for-profit company that is doing work in line with the charitable purpose of the foundation.

BENEFIT CORPORATION

Ideal for: companies that want to create a measurable positive impact while and providing greater transparency to the public

Available to start-ups in: Maryland, Vermont, Virginia, New Jersey, Hawaii, California and soon New York

The Benefit Corporation is a new class of corporation with a corporate purpose to create public benefit, a broader fiduciary duty and is transparent about its overall social and environmental performance.

By definition, it must operate for the general public benefit – defined as a material positive impact on society and the environment. Every benefit corporation is required to publish an assessment using an independent, third-party assessment tool. To create a material positive benefit, a benefit corporation operates in a manner that not only creates value for the company’s shareholders, but also its community, environment, employees and suppliers.

The structure also calls for a high level of transparency and accountability. Within 120 days after the end of each fiscal year, a benefit corporation is required to publish a “Benefit Report,” which states how it performed that year on a social and environmental axis.

FLEXIBLE-PURPOSE CORPORATION

Ideal for: companies seeking to do good on their own terms

Available to start-ups in: California

The Flexible Purpose Corporation a new class of corporation that creates the maximum amount of flexibility for socially/environmentally conscious companies. It is designed for businesses that want to pursue profit along with a special purpose of its own designation.

The structure allows the designation of a special purpose that the company will pursue in addition to profit. For example, a flexible purpose corporation might be a for-profit developer that has a special purpose of building a public park in each of its developments.

This type of corporation must issue an annual report that is available to the public and provides details on the following: the special purpose; the annual objectives that it has set to achieve its special purpose; the metrics used to gauge the success of the special purpose; how it has achieved or fallen short of the stated objectives; and how much money was spent in furtherance of the special purpose. But it does not require any measurement against an independent third-party standard.

Comments (6)

  1. Charles Beck

    January 16, 2012 at 1:11 pm

    Kyle
    We are in concept development with now funding. We feel the need to protect our ideas though. $10,000 dollars is a lot of money right now. Is there a packet where we could do a lot of the leg work and present to the legal end and save time and money. Trying to decide between L3C and For Benefit, looking for the most versatile to receive funding from all sectors.
    We are in Arizona, if the legal structure doesn’t fit this state could we file in California but reside in Arizona.

    Thank you for your service and this Web site!

    Charles

  2. Karrie

    January 16, 2012 at 7:04 pm

    I appreciate the explanation of each of these new corporations. Thank you for keeping us current.

  3. Kyle Westaway

    January 19, 2012 at 9:52 am

    Charles-

    That $10,000 is a high number, but that is the maximum you should be charged by a big firm. Many firms, including http://westawaylaw.com are much more reasonable than that.

  4. Sarah

    February 17, 2012 at 9:03 pm

    Hi Kyle,
    Am I understanding it correctly that the L3C is the only one able to be funded through philanthropic PHI, and not available in CA? I’m asking because I am in California and weighing the options between nonprofit and corporate structures for a social enterprise.
    Thank you.

  5. Kyle Westaway

    March 13, 2012 at 12:24 pm

    Sarah-

    I think you are referring to PRI (Program Related Investments). L3C’s are designed specifically to receive PRI funding. But PRI’s can be made to any for-profit legal structure that is pursuing a charitable purpose as defined by the IRS.

    There are a number of posts on this site that you should check out if you are interested to learn more in L3Cs. Thanks.

  6. Kyle Westaway

    March 13, 2012 at 12:25 pm

    Also, you can incorporate in a state that you don’t do business in.

    If you have any additional questions, shoot me an email via the contact link.

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