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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 Books, TOMS Shoes, D-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.
B Corps: Firms With Benefits
Originally posted in The Economist
By: Matthew Bishop
He likes to do things differently. Yvon Chouinard changed his favourite sport, mountaineering, by introducing reusable pitons (the metal spikes you bang into the rock face and attach a rope to). Climbers often used to leave pitons in the cliff, which is environmentally messy, another of Mr Chouinard’s peeves.
In business, Mr Chouinard, the founder of PatagoniaOriginally posted in The Economist He likes to do things differently. Yvon Chouinard changed his favourite sport, mountaineering, by introducing reusable pitons (the metal spikes you bang into the rock face and attach a rope to). Climbers often used to leave pitons in the cliff, which is environmentally messy, another of Mr Chouinard’s peeves. In business, Mr Chouinard, the founder of Patagonia, an outdoor-clothing firm, says he believes that well-treated employees perform better. (He wrote a book called: “Let My People Go Surfing”.) Before it was fashionable, Mr Chouinard preached a philosophy of sustainability and long-term profitability that he calls “the slow company”.
On January 3rd Patagonia was anything but slow in becoming the first firm to take advantage of a new California law designed to give businesses greater freedom to pursue strategies which they believe benefit society as a whole rather than having to concentrate on maximising profits for the next financial quarter. According to Mr Chouinard, the new “benefit corporation”—usually referred to as a B Corp— creates the legal framework for firms like his to remain true to their social goals. To qualify as a B Corp, a firm must have an explicit social or environmental mission, and a legally binding fiduciary responsibility to take into account the interests of workers, the community and the environment as well as its shareholders. It must also publish independently verified reports on its social and environmental impact alongside its financial results. Other than that, it can go about business as usual.
The B Corp is a deliberate effort to change the nature of business by changing corporate law, led by B Lab, a non-profit outfit based in Pennsylvania. California is the sixth state to allow B Corps; the first was Maryland, in April 2010. Patagonia was followed immediately by another 11 Californian firms, including Give Something Back Office Supplies, Green Retirement Plans and DopeHut, a clothing retailer. Across America, there are now several hundred B Corps. Before Patagonia, the best-known was probably Seventh Generation, a maker of green detergents, paper towels and other household products.
California’s B Corp legislation took effect alongside a new law creating the “flexible purpose company” (FlexC), which allows a firm to adopt a specific social or environmental goal, rather than the broader obligations of a B Corp. Another option in America is the low-profit limited liability (LC3) company, which can raise money for socially beneficial purposes while making little or no profit. The idea of a legal framework for firms that put profits second is not confined to America. Britain, for example, has since 2005 allowed people to form “community interest companies”. Similar laws are brewing in several European countries.
The impetus for all this comes from people like Mr Chouinard, who believe that existing laws governing corporations and charities are too restrictive. For-profit firms, they argue, often face pressure to abandon social goals in favour of increasing profits. Non-profit firms and charities are needlessly restricted in their ability to raise capital when they need to grow. This prevents socially minded organisations from pursuing their goals as efficiently as possible. Existing laws for co-operatives and mutual companies are inadequate. Hence the need for B Corps and other novel structures, goes the argument. There is no tax advantage to being a B Corp, but there is to some of the new legal structures.
Whether these new legal forms will change business that much remains to be seen. Supporters of existing corporate law say it does not prevent firms, if they so wish, from setting social and environmental goals or rigorously reporting on their performance in delivering them—and that pursuing profit is often the best way to benefit society. Nor is it clear how much difference in practice will be made by the obligation of a B Corp to weigh interests other than profits. How does one measure such things? What counts for more: a clean lake or a happy neighbour? .
Mr Chouinard argues that making a firm’s social mission explicit in its legal structure makes it harder for a new boss or owner to abandon it. Perhaps so. B Corps will be tested in the market. Anyone who feels inspired by a B Corp’s mission is free to invest in its shares, or work for it.
Photo: Wanaku
CO Introduces Benefit Corporation Legislation
DENVER–A proposed state Senate bill creating special legal status for companies harmonizing good will and profits has some long-time Colorado business attorneys wary of its repercussions on existing state laws for corporations.
Several states recently adopted “benefit corporation” legislation approving special legal status for companies combining elements of nonprofit and for-profit legal structures. The proposed Colorado legislation will allow companies to opt for a “hybrid” status, requiring them to show profit motives alongside periodic reporting aligning with a social or environmental mission, similar to those of a nonprofit.
“Our interest in benefit corporation legislation is to help promote alternatives to the conventional legal structures of business entities with certain goals and to support social and environmentally conscious business organizations that are also for-profit,” said Jason Wiener, general counsel of Namaste Solar, an employee-owned cooperative residential and commercial solar power company in Boulder.
Directors of companies who opt for benefit corporation status get special protections from shareholder lawsuits when making decisions aligning with charitable causes. Proponents of benefit corporation legislation in Colorado argue current corporate laws only consider the sole goal of maximizing profits.
Said Sen. Bob Bacon, D-Fort Collins, “It’s a new corporate model that many people are interested in. It will have great benefits and bring greater investment and economic activity in Colorado.”
Several business attorneys in Colorado are cautious of the new legislation beacuse it conflicts with business and corporate legal statutes already in place. What may work in states like Maryland, the first state to adopt benefit corporation legislation, may not work in Colorado.
“Lots of for-profit corporations do lots of good things under the rubric of public relations and marketing without any problems,” said Bob Keatinge, an attorney at Holland & Hart and member of the Colorado Bar Association’s business law section.
Originally posted in: Law Week Colorado
Photo: Striking Photography by Bo
Patagonia Asks Its Customers ot Buy Less!
This is the type of business we should be creating!
Patagonia’s Common Threads from Dokument Films on Vimeo.
Socent Law LIVE! – NYC
This fall you have not one, but two, opportunities to attend a live lecture about the legal structures for social enterprise in New York City. Click on the date below for more details.
October 11th / 7:00 PM / Skillshare HQ
November 8th / 7:00 PM / General Assembly
Class Description:
Have a great idea for social innovation, but trying to figure out whether it should be a nonprofit or a for-profit? Have you heard something about these new hybrid legal structures but can’t figure out what the heck they do? If so this course is for you! We’ll be digging into:
- 501(c)(3)
- L3C
- Benefit Corporation
- B Corp Certification
- LLC
- Corporation
photo: elsonpro
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