Kyle Westaway, Author at socentlaw - Page 5 of 6

FLEXIBLE PURPOSE BILL INTRODUCED IN CA

Add California to the list of states that is contemplating a new corporate structure that for social entrepreneurs that are seeking to create mission driven for profit companies. On Tuesday, February 8th, The Corporate Flexibility Act of 2011 was introduced into the California Legislature.

The proposed legislation is the first of its kind and is distinct from the Benefit Corporation laws currently on the books in Vermont and Maryland and pending in seven other state legislatures. Stay tuned for a post focusing on the differences in the the two approaches. It should be interesting to see which approach ends up being adopted by the most states in the end.

photo: PatrickSmithPhotography

COLORADO BENEFIT CORPORATION LEGISLATION INTRODUCED

Today Senate Bill 11-005, a bill for the creation of a Benefit Corporation, was introduced into the Colorado state senate. This legislation is similar to the Maryland Benefit Corporation, but there are a few major differences. We will post a more in depth comparison soon, but for now, we want to highlight two key differences.

Election of a Benefit Director

The Colorado legislation requires the election of an independent director to the board who is responsible for monitoring the actions of the Benefit Corporation in regards to it General Public Benefit and Specific Benefit. The Benefit Director is also required to draft the Annual Benefit Report.

Expanded Reporting Responsibilities

The Colorado legislation requires more detail in its Annual Benefit Report as well as requiring the Benefit Corporation to file the Annual Benefit Report with the Secretary of State.

photo: QualityFrog

MISSION AND MONEY: A DANGEROUS MIX

Are so-called hybrid organizations such as B Corporations and Low-Profit Limited Liability Companies (or L3Cs) good models for social entrepreneurs?

Social entrepreneurs are quite excited about this new trend of mixing mission and money within the organizations they run.  You can often hear many of them proclaiming their intention to “do well by doing good,” implying that they will not only save the world but they will make money doing it. Behind the slogan, these entrepreneurs are experimenting with what we call “hybrid” organizations.  In the for-profit world, new organizational creatures with descriptions like “social business” are now prioritizing social and environmental goals equally with financial performance.  Among non-profits, social entrepreneurs are launching what are usually called “social enterprises” or income-generating businesses, like coffee shops, thrift stores, and bakeries, within non-profit organizations.

One the surface these hybrid organizations look very promising—an opportunity to have your cake and eat it too.  The reality, however, is that these hybrid organizations come with substantial risks and consequences that are rarely discussed and that need to be carefully taken into consideration from the start.

Last week I participated in a research symposium on “Exploring Social Enterprises” at the UCLA School of Public Affairs; much of the discussion centered on organizational hybrids.  Several researchers presented truly cutting-edge findings about the consequences of choosing the hybrid organizational type.  Cumulatively, this research identified four key risks associated with hybrid organizations.

The first, overarching risk is that people just don’t know what hybrids are. Is it a for-profit? Is it a non-profit?  Is this about mission or money?  This ambiguity doesn’t just affect potential investors who, for a start, are often not sure whether these organizations are a fit for venture capital or venture philanthropy.  The ambiguity also affects board members who are not clear on whether their primary responsibility is to uphold mission or financial performance. Internally managers and staff face similar confusion and their decision-making often wavers or stagnates as a result.

Risk No. 2 is that these hybrids often have no clear systems of accountability. In traditional for-profits, everyone knows that profit maximization is the ultimate goal.  In traditional non-profits, everyone knows that social impact is the ultimate goal.  In hybrid organizations, these two goals are purportedly equal and yet they are often at odds.

The magnitude of this risk is easily understood by looking at funding flows to hybrid organizations—they are virtually non-existent. Capital flows require transparency and certainty, particularly with regard to the organization’s priorities. For hybrids with two equal priorities and no transparent system to uphold them, the risk of misalignment and failure is extremely high. Consequently, capital avoids these investments.

Over the past few years innovations such as B Corporations and Low-Profit Limited Liability Companies (L3Cs) have attempted to provide mechanisms to create this transparent accountability.  But without formal, widespread legal infrastructure to codify decision-making authority, the risk of weak accountability is too high.

Risk No. 3 is that hybrids often have difficulty maximizing either social impact or financial sustainability.  As the dichotomy between these two forces pulls social entrepreneurs in different directions, hybrid organizations often experience both internal and external pressures to lean more in one direction or the other. Non-profit social enterprises often ultimately choose social mission as their priority and find their enterprise running at a loss.  For example, the leaders of one non-profit operating a Ben & Jerry’s Partnershop decided that their commitment to employ disadvantaged youth with serious social and emotional challenges outweighed the gains in customer service that could be had from hiring more “polished” employees. The non-profit also determined that it was necessary to employ a social worker as full-time support staff for the youth in the ice-cream shop. Unsurprisingly, the Partnershop operated at a net loss.

For-profit hybrids often ultimately prioritize profit over mission and thus compromise their social and environmental impact.  The social entrepreneurs who founded Blue Avocado, makers of a line of hip reusable shopping bags, found early on that they had to make difficult choices about the level of environmental sustainability they could achieve for a competitive price. Their original hope was to create a locally sourced, fully organic cotton bag, but with a resulting unsustainable price they realized that some sacrifices on sustainability would be required to keep their social business viable.

Finally, Risk No. 4 is that as hybrids face pressures to maintain financial sustainability it will come at the price of a long-term erosion of moral legitimacy. One research study presented at UCLA investigated social service non-profits that employ their clients through jobs-training programs at social enterprises such as coffee shops and janitorial services companies. In these organizations, moral legitimacy was often questioned as clients were increasingly treated like regular employees and were “commoditized” by the business. A second study looked at the particular case of NPower, a non-profit technology provider that received substantial cash and in-kind support from Microsoft. As NPower was perceived to become more “business-like” in its operations, peer organizations questioned their non-profit integrity and social focus.

The net result is that hybrid organizations are not exactly the panacea they appear to be. Mixing mission and money is tricky business, requiring strong leadership to articulate and maintain clear priorities and accountability.  The attraction to this type of organization is rooted in our hopes of find more financially sustainable ways of creating social and environmental impact. But as social entrepreneurs explore this intriguing territory, we must also beware of serious and substantial risks.

reposted from Inc.com November 15, 2010

By: Suzi Sosa

Photo By: drburtoni

BC LIBERALS PROPOSE ‘HYBRID’ SOCIAL ENTERPRISE COMPANIES WITH PROFIT CAP

The Campbell Liberals are mulling changes to the Business Corporations Act that would clear the way for the emergence of a new “hybrid” company focused on “community interest.”

Investor returns would be capped but companies in the sector would have a measure of sustainability in their business models which would presumably offset a lack of opportunity for windfall profits.

“Community interest companies would be incorporated with all the flexibility and certainty of regular companies, but under legislation that ensures they primarily benefit the community,” says a British Columbia government news release this week.

The model for this initiative comes from the United Kingdom, which has seen 4,200 social enterprise companies emerge since 2005 in response to amendments to its Companies Act.

Businesses could include family services, recycling programs, education programs – with limited investor returns that would distinguish them from the non-profits you typically find in these sectors.

A switch to this designation would be “irrevocable” according to the release, and the only way to end hybrid status would be to break up the company – and even then assets could not be distributed to shareholders.

Organizations that would have an interest in this model could include, and this is speculation at this point, the Vancouver Foundation, B.C. Centre for Social Enterprise, and the Vancity Community Foundation.

No special tax breaks are contemplated – and with the British Columbia small business tax dropping to zero next year, why would they?

The B.C. finance ministry has posted a ‘community interest company consultation’ link on its website, www.gov.bc.ca/fin and has set a December 1 deadline for responses.

(No disrespect to Finance Minister Colin Hansen, or Surrey-White Rock MLA Gordon Hogg who is the primary advocate for this idea, but I have to ask – am I alone in thinking this sounds more like an initiative of the B.C. New Democratic Party than one of the B.C. Liberal Party?)

By SCOTT SIMPSON 21 OCT 2010

from The Vancouver Sun

photo: kennymatic

HYBRID MODEL FOR NONPROFITS HIT SNAGS

Since its founding in 2003, the GlobalGiving Foundation has used its Web site to channel more than $30 million to charitable projects like buying seeds for farmers in Zimbabwe and feeding orphaned chimpanzees.

It also sent approximately $10 million in payments and loans that were never repaid to a company, ManyFutures Inc., that was largely owned by GlobalGiving’s founders, Mari Kuraishi and Dennis Whittle, former World Bank executives turned social entrepreneurs.

ManyFutures provided the technology platform on which the GlobalGiving Web site operated, and which it hoped to sell to others. But the company never broke even, even though it paid nothing for the platform, which had been donated to ManyFutures. In late 2008, GlobalGiving converted its loans into ownership of the company, paying Ms. Kuraishi and Mr. Whittle just $12,000 for their stakes.

They had invested $1.4 million. “I lost a large majority of my net worth doing this,” Mr. Whittle said. “It’s been personally very painful.”

GlobalGiving is one of the most prominent examples of the hybrid model of social enterprise that married a profit-making business to a nonprofit organization. Such dual-mission companies have sprouted over the last decade as a means of addressing the financing difficulties faced by many nonprofit groups, particularly as they need capital to expand. “It is virtually impossible to grow a social enterprise in any significant way relying wholly on donated money, earned revenue and debt financing, which are the only sources of financing available to nonprofits,” said Allen Bromberger, a lawyer with extensive experience in nonprofit financing. “These hybrid structures allow social enterprises to tap conventional investors interested in making profits while continuing to pursue their social missions.”

But like Dr. Dolittle’s pushmi-pullyu, the animal that had trouble moving because its two heads could not agree on a single direction, the hybrid model for nonprofits is proving problematic. On occasion, the need to generate returns for investors overwhelms the social mission. In other cases, the business falters altogether and cannot support the nonprofit.

Within the last two years, several ventures have split up or been dissolved. For example, World of Good’s commercial unit was bought by eBay, and its nonprofit arm is now struggling to stand on its own. Another prominent hybrid, Pura Vida Coffee, almost collapsed. And some, like GlobalGiving, demonstrate how hard it is to “cash out” of a venture that is not purely commercial. It wound up using foundation grants to prop up its losing profit-making partner.

Mr. Whittle said two things drove their decision to create a hybrid. “We looked at the philanthropy and didn’t think we could raise the capital required to support the technology, and we wanted to impose a brutal bottom-line discipline on what we were doing,” he said.

Investors have increasingly voiced concerns about hybrid groups. “This conjoined structure really has problems,” said Kevin Doyle Jones, a partner at Good Capital, one such investment firm. “Embedded in it is an inherent risk that individuals are profiting from donations that were made for public benefit.”

These entities, he cautioned, should avoid engaging in “private inurement,” or providing excessive benefit to a person who is close to or has a controlling interest in a nonprofit — though tax law says nothing about how much is too much.

Even newer models are evolving. Several states have passed legislation that permits the creation of so-called LC3 companies, which can raise money from traditional capital markets but place social benefit ahead of profit, and B Corporations, which are certified based on their ability to demonstrate that their business produces certain social goods. But Will Rosenzweig, a founder of the specialty tea company Republic of Tea and now the managing director of Physic Ventures, another firm that looks to invest in companies that bring social benefit, expressed skepticism of the new models. “I think you really have to make a choice and be a business or be a nonprofit,” he said. “It’s hard to be both.”

Concerns about the hybrid model surfaced in a very public way earlier this year when a tiny nonprofit in Seattle, Unitus, abruptly announced that it was letting go almost all of its employees and no longer accepting donations.

The award-winning nonprofit had helped commercialize the microfinance industry through its profit-making venture capital arm, which had made investments in several microfinance banks that were poised to go public, generating huge returns for investors, some of whom were Unitus board members.

There are, of course, examples of pushmi-pullyus whose two heads have learned to collaborate. In a structure reminiscent of mutual insurers of yore, members of the nonprofit Freelancers Union own the profit-making Freelancers Insurance Company, and both are affiliated with the charity Working Today. Board members of the nonprofit sit on the board of the profit-making company, and employees of both determine how expenses are allocated among the three organizations.

“It’s complicated but necessary,” said Sara Horowitz, who often jokes that she is the lowest-paid chief executive of an insurance company in America. “The structure ensures that there is no way that Freelancer’s Union could be sold for the benefit of any individuals or that the nonprofit could be abused for the benefit of the company.”

That allows Freelancers Insurance to focus on lowering the price of insurance than a conventional company could, she said.

For many hybrids, however, neither partner is achieving its mission and, as Unitus found, pulling them apart is tricky. “These tiered capital structures where you have some mission-oriented capital combined with commercial capital can be challenging,” said Laura Callanan, a consultant in McKinsey & Company’s social sector office. “When everything is going well, everyone is getting along and interests are aligned. But when financial challenges hit, the fact that there are different objectives creates questions about how the pain is shared.”

When World of Good Inc. was sold to eBay and the GreaterGood Network this year, its nonprofit half was effectively orphaned, stripped even of its name.

World of Good Inc. had been established in 2004 to help connect small artisans around the world to major retailers. World of Good Development, its nonprofit partner, was charged with developing a free online tool to help calculate a fair wage and improve negotiating power with buyers.

“Those activities needed to be done in the public interest, and so we put that tool into open-source space,” said Priya Haji, chairwoman of the nonprofit board and a founder of the company.

Traditional venture capital supported World of Good Inc. The nonprofit held a 5 percent stake in it and was to receive 5 percent of its profits. “The nonprofit’s work never benefited the business,” Ms. Haji said.

Nor did the business’s operations ever benefit the nonprofit. “They were never profitable, so we did fund-raisers to support the organization,” said Holly Boyer, a board member of World of Good Development and its former executive director. “The business would host a fund-raiser and sell products where we were part of the event and would speak and talk about our work and get half of the proceeds from the sales.”

When World of Good Inc. was sold in February, the nonprofit got a $100,000 grant from eBay and its shares were retired. Ms. Boyer said the grant was intended to help the nonprofit rename itself, since eBay purchased the World of Good brand.

Whether the nonprofit got a fair deal for its stake in World of Good Inc. is unknown. “The transaction was private, so I’m not at liberty to talk about it,” Ms. Haji said.

Pura Vida Partners, the nonprofit partner of Pura Vida Coffee, also is changing its name, the result of a similar divorce imposed by Jeff Hussey, a no-nonsense investor who took control of the company in 2009, having sunk more than $3 million into it to keep it afloat.

“The business model was flawed,” Mr. Hussey said. “Whenever you have an organization of human beings with a blurry mission you get blurry results.”

Pura Vida was created in 1998 by John Sage and Chris Dearnley, former classmates at the Harvard Business School.

They set up a foundation, Pura Vida Partners, and gave it ownership of the company. But when the company needed money to grow, it could not get access to traditional lines of capital because of its ownership structure, a problem that led it to embark on a series of complex financial transactions involving wealthy private investors, including Mr. Hussey. “There was a lot of pretzel logic and gymnastics to create financing vehicles and structures that would let us continue to grow and continue our social mission,” Mr. Sage said.

Those transactions diluted the nonprofit’s stake in the company to 9 percent by 2009, when Mr. Hussey took over. “We could either agree to the dilution or lose the business — and all the funding streams for the nonprofit that had been established through the business,” Mr. Sage said.

Mr. Hussey purchased the nonprofit’s final shares for $200,000. “I overpaid,” he said. “I had to because of the laws governing nonprofits.”

Today, the Create Good Foundation, as the nonprofit will be known, is a stand-alone charity that supports clean water and economic development projects in the areas where the profit-making company, Pura Vida Create Good, buys its raw materials.

“Our goal now is to sell coffee, wine, tea, chocolate and other things and do it profitably,” Mr. Hussey said. “There’s nothing blurry about what we do and why we do it.”

from New York Times October 25, 2010

By STEPHANIE STROM

photo: SantiMB

SOCAP – DAY 2 RECAP

Day 2 at SOCAP… what a blur. We met so many amazing people and sat in on some of the best sessions of the conference. Below are some of the highlights from those sessions.

Seed Investing For Social EnterpriseRoss Baird, John Hardman, Kim Scheinberg, Tim Freundlich, Jessica Jackley

This panel was, by far, the most entertaining panel at SOCAP. I hate to say it, but you really had to be there to experience it… start saving your pennies for your ticket to SOCAP11 so you don’t miss out next year. Here are some of the best lines from the session in no particular order.

Village capital model uses the wisdom of a group of entrepreneurs to decide who to invest in. The HUB is launching a village capital fund called HUB Village Capital. It’s launching now with a cohort of 20 entrepreneurs at the HUB Bay Area. -Freundlich

Profounder is going live with 20 entrepreneurs looking to raise seed capital through private fundraising campings. The investors enter into a revenue sharing, not equity deal. Entrepreneurs looking to raise capital can do a private campaign for friends and family, or a campaign to the broader public. The unique twist on the public campaign is that once an investor makes his/her money back, the remaining proceeds go to a charity of his/her choosing.  – Jackley

I hate philanthropy.  – Scheinberg

Q: How does one get seed capital? A: Tell your story in a genuine way. -Jackley

If you are sitting in this room, you don’t need my money. -Scheinberg

Kiva was rejected twice by Echoing Green. I was rejected from Stanford Business School. You don’t need to be a part of any club to make it.  – Jackley

Not everyone thinks your kid is cute. Not everyone wants to steal your idea. – Scheinberg

Typically the relationship between the seed investor and the entrepreneur is like performing fellatio and having your hair grabbed. – Scheinberg (I think this was a comment on the power dynamics involved… but make of it what you will)

ReachScale Lunch Discussion – Corporations and Social Enterprises

David Wilcox curated a sharp group of people at this private lunch event. The topic was centered around the questions: How can large corporations and social enterprise work together? How can a partnership with between the two go beyond a transfer of money to assuage corporate guilt? Can real, equal partnerships exist? If so, what does that look like? This was by far the most engaging and intellectual discussion of the conference. I cannot do justice to the discussion here, but I will point you to a must read Harvard Business Review article on the Hybrid Value Chain by Ashoka.

The People Side of Triple Bottom Line – SJF Ventures, Endeavor, Better World Books

This panel discussed the bottom line that is all too often treated as an afterthought in triple bottom line accounting… people. The panelist discussed innovative ideas to engaging employees.

SJF Ventures presented highlights from an forthcoming report on the topic. One idea that caught my attention was Open Book Management.Open book management is a management stractegy based around transparency and accountablity from management to employees, whereby management discloses key financial metrics to the entire team so at they can rally around those goals and use them as a benchmark for success. For example, if your social enterprise needs to close $1.8 million of deals this year, that key metric is shared very publically with your employees. They use is as a goal and a constant benchmark for gauging success. Open book management is a simple, but often overlooked technique of creating employee buyin for the company’s goals. Combined with appropriate performance-based incentives, open book management can engage employees while motivating everybody to achieve stated goals.
Better World Books is the best example I’ve seen on employee engagement for two reasons: their approach to stock options and their response to the recession. Better World Books has instituted an incredibly generous stock option program: they give stock options to EVERY full time employee that has been there over a year. Currently 70% of their full time employees have options…. the other 30% are waiting to hit their one year anniversary. The fact that 30% of their full time work force has been employed less than a year shows that this type of employee engagement can lead to incredible growth in a social enterprise.

Better World Books was not immune to the recession, when it hit, their business suffered. Management had some difficult choices to make about how to cut costs in order to survive. like any business, they contemplated laying off employees, but in the end, they decided on a different approach. During the recession they cut everyone’s pay in order to avoid any layoffs, but they did this on a graduated basis, the highest paid managers took the biggest cut, and the lowest paid employees took the least cut. As business started picking back up, management decided to reinstate the lowest paid employees’ pay first, then gradually reinstate the better paid employees. The top levels of management didn’t reinstate their own pay until a year after the lowest employee’s pay was reinstated.  The outcome was a more loyal and engaged workforce.

These are but a few examples of some of the great ideas around fully engaging the most important resource any social enterprise has… its people. For more on employee engagement check out www.engageemployees.org

SOCAP – DAY 1 RECAP

The first day at SOCAP was impressive. In only its third year, SOCAP completely sold out. There are 1198 attendees and many of the session rooms were overflowing. The Mason Center is an incredible venue with views of the Golden Gate Bridge, the perfect spot for SOCAP.

What we were most excited about on Day 1 of SOCAP was Jay Gilbert’s of B Labs keynote speech to close the day. His theme was the absolute imperative to creating a distinct asset class for impact investment. This asset class must have a single standard of measuring impact for triple bottom line companies, and he noted that GIIRS has garnered widespread support from government, business, foundations, and funds to be THE standard by which we can measure impact. He announced that 25 GIIRS Pioneer Funds have committed to using GIIRS as their metrics for measuring impact. Gilbert closed with a call to action, “If you want to plan for a year invest in a company. If you want to plan for a decade invest in a fund. If you want to plan for a century invest in an asset class.”

But the most exciting from Gilbert was buried in the middle of his speech. As of October 3rd, only 3 business days after the Maryland Benefit Corporation statue went into effect, 11 companies have filed as Benefit Corporations! Out of those 11, B Labs had only had a conversation with one of them. So, clearly the demand for the Benefit Corporation exists. All we need to do is make the structures available and companies will respond.

The day started with a welcome from Kevin Jones and keynotes from Jacqueline Novogratz of Acumen Fund, Matt Flannery of Kiva and Kushal Chakrabarti of Vittana.

Novogratz was spreading her message of patient capital and the importance of measuring impact through PULSE. She spoke of the aid community looking to social enterprise to understand how to reform their efforts. She closed with a passionate call to action. We are the ones to create this movement that will bring equity to humanity.

Flannery, who started by celebrating the fact that Mohammed Yunus had made it on The Simpsons on Sunday night, was talking about the struggles that Kiva had starting a new category of online microlending. He ran into opposition from both the charity world and the business world. One side said Kiva is not charity, but the other side said that it’s not really business either. He had to navigate the legal landscape very carefully in order to get Kiva off the ground in the US, due to securities regulations.  Looking ahead, Kiva’s biggest challenge is not a struggle for capital or for lenders, but a fight for the most rare commodity – attention. How does Kiva – who gives loans to farmers in the developing world – compete with the massively popular online game Farmville – where users tend to their “virtual farm”.

Chakrabarti talked about the success of Vittana, an online micro-student lending site. It seeks to address the main obstacel for students to stay in school in developing countries – money. 70% of students that dropped out of school in Uganda dropped out due to the cost of school.

Those were the main highlights of Day 1. Stay tuned for Day 2 Coverage.

SHOULD YOUR BUSINESS BE FOR BENEFIT

Reposted from Harvard Business Review

by: Will Patten

It is hard to overstate the role and impact of business today. As an area of human endeavor, Business — with a capital B — is clearly the most powerful force in the world. It can boast the greatest concentration of talent, resources, and fresh thinking.

And many aspects of western civilization appear to be in crisis. Health care, education, transportation, environment, wealth distribution, energy … the list goes on. The needs are great, and solutions are shockingly scarce.

Whether Business is responsible for the current crises can be argued forever. We don’t have time for that argument. The point I want to make is that, as the dominant power in the world, Business will have to be a major part of the solutions.

For many business leaders, that fact is energizing. They know that they are in command of powerful organizations that could be powerful forces for change. But there’s a problem: corporate law in the United States compels any publicly traded corporation to put the financial interests of shareholders above all other interests — and shareholders have come to expect immediate and sizable returns on their investments. As a result, much of the creative talent housed in many businesses is focused on maximizing shareholder value in the near term, even at great risk, and even when the means of achieving it might not be in the long-term interests of anyone — including shareholders. Shortcutting safety procedures in deep water oil drilling immediately comes to mind.

It’s an interesting notion that Business, held captive by a narrow definition of fiduciary responsibility, is not able to make the long-term investments that could benefit communities, the environment, and ultimately the shareholders. If this notion is even partly correct, then our most powerful institution will be unable to do enough to solve the social and environmental crises confronting us.

Earlier this spring, Vermont made a new path available. Through an initiative called the Vermont Benefit Corporation, it provided for a different class of organization — one that exists not simply “for profit” but “for benefit” and therefore expands the definition of fiduciary responsibility beyond an exclusive obligation to shareholders to encompass the interests of all corporate stakeholders, including employees, the local economy, and the environment. Are the directors of a Benefit Corporation still obliged to act in the best interests of the company’s owners? Absolutely. But they have legal protection to make investments with an eye to the long term, aiming for sustainable returns, not fast paybacks for shareholders. (To learn more about the Vermont Benefit Corporate Charter see this pdf of the enabling legislation, or you can read an excellent article here.)

In 1994, on the Fourth of July, Czech Republic President Vaclav Havel gave a speech in Independence Hall, Philadelphia, that resonated with many. “Today, many things indicate that we are going through a transitional period,” he said, “when it seems that something is on the way out and something else is painfully being born. It is as if something were crumbling, decaying, and exhausting itself — while something else, still indistinct, is rising from the rubble.”

For some, it seemed clear what was crumbling and decaying: an economy based on consumption, and driven by overdependence on growth. Some made it their business to give the future a less indistinct shape. Business may or may not be the root of our problems, but the solutions will come more quickly and be more durable if we can find a way to involve Business in them. The option of Benefit Corporation status may be just what Business needs in order to do the right thing for all of us.
Will Patten is the Executive Director of Vermont Businesses for Social Responsibility (VBSR), a statewide not-for-profit organization promoting triple bottom line business practices. It is the largest such organization in the US. Mr. Patten was formerly Director of Retail Operations for Ben & Jerry’s, where he retired after a 22 year career.

photo: Nicholas Erwin

THE BOULDER SUMMIT

Today is an exciting day in the world of social enterprise law because it marks the first day of a weekend-long summit of top social enterprise attorneys from around the country. These attorneys have flown into Boulder to spend the weekend brainstorming about how they can collaborate together to serve the emerging sector of social enterprise more effectively and more efficiently. Regardless of the outcome, social entrepreneurs around the nation should be expecting an innovative approach to legal services. And of course, if there are any announcements coming out of this weekend, you’ll hear it here first.

In the mean time, you should get to know some of the attorneys involved:

Jenny Kassan

Bruce Campbell

Brian Howe

Jochem Tans

Kendall Thiessen

Kyle Westaway

photo: jaxxon

LC3 Part 3: Critique and Conclusion

Critique:

A simple internet search on the L3C will quickly reveal how popular the concept has become with social entrepreneurs, non-profit bloggers and organizations, some politicians and many attorneys. However, there are a number of cautious voices as well.

Among the naysayers are attorneys Daniel Kleinberger and J. William Callison, co-authors of a recent article, “When the Law is Understood-L3C No.” The authors first point to the failure of L3C lobbyists to convince the federal government to view L3C investments as automatically qualifying as PRIs. Unless and until Congress, the IRS, and Treasury create a rebuttable presumption that L3C investments are PRIs, private foundations will not be more attracted to L3Cs than they are to investments in ordinary LLCs. L3Cs are in no better of a position to receive PRI treatment than the LLC form to which they may default. See also William Callison, L3Cs: Useless Gadgets?, Business Law Today Volume 19, Number 2 (2009).

Second, Callison and Kleinberger raise concerns over the “tranched investment” structure of the L3C and note the potential of non-charitable investors receiving non-profit tax exempt privileges if the L3C is not structured carefully. Third, the authors question the branding capacity of the L3C in light of the first two concerns that the L3C has no legal or market substance.

Finally, and most importantly, the authors question how the required L3C language providing that “no significant purpose of the company [can be] the production of income or the appreciation of property” can work with tranched investing. If the L3C is structured so that the third-tier investor (hypothetically an institutional investor) receives a market rate of return, it seems to necessitate that profit is a significant purpose of the company. Other authors have raised similar worries over the lack of “ceiling” on profit in these “low-profit” entities and the lack of an agreed upon definition for what “low-profit” means. Rick Cohen, in Washington Nonprofit Insight, asks, “When does some profit become too much profit, if ever?” L3C: Pot of Gold or Space Invader?, September 30, 2009.

Conclusion:

It is prudent and understandable to be hesitant regarding jumping on the L3C bandwagon just because it is the newest and most exciting legal structure to come along in a decade. After all, in addition to the concerns regarding the lack of automatic designation of all L3C investments as PRIs and other possible tax issues related to the tranche structure, there’s a distinct possibility that L3Cs will result in the diverting of foundation funds from important non-profits.

However, the momentum behind the L3C movement is such that it has gained substantial lobbying power and will be able to continue pressuring the IRS to designate L3C investments as PRIs. Additionally, while the nonprofit ecosystem may suffer a slight downturn, overall charitable efforts may see a significant upturn.

Thus, social entrepreneurs who understand the structural benefits and shortcomings of the L3C may see the market benefit of being an early adopter, the branding capacity, and the potential for attracting foundation dollars as reasons enough to risk adopting the L3C structure. As it gains more widespread acceptance, the L3C will likely help social ventures access billions of dollars from private investors looking for social return and foundations looking to invest their five-percent charitable minimum through PRIs. While the L3C is not the right structure for every social venture, it is a powerful and innovative legal solution that will be an important part of social entrepreneurship achieving more rapid growth and widespread recognition.

photo: Nicholas Valentin