During my first year of business school, in the law course, we learned about the different types of corporate structures: LLC, S-Corp, C-Corp etc. We discussed the reasons why a company may choose one structure over another; this usually related to creating liability shields for the owners, filing costs and tax burdens.
As time marches away from my classroom studies, I have discovered that there are more nuances to choosing a business entity. For starters, we didn’t even discuss why an entrepreneur may choose to set up as a non-profit, (which, by the way, does not mean “no-profit”). Further, new corporate structures have emerged since then as a way to address the shift in business values that are geared more towards the triple bottom line.
As you think about the structure of your business, it’s important to understand where you fall along the spectrum of “Do Good Index” (and for the sake of this article, I’m creating the DGI: Do Good Index).
Many of the businesses I work with (including myself) are committed to doing good, whether through growing or cooking good food; reducing environmental impacts; or supporting other do-gooders with financing or technical assistance. These businesses with a social component find themselves in a unique position: somewhere between the non-profit and for-profit worlds. And doing well by doing good.
You may choose to designate your business as a “non-profit” as a way to highlight your social mission, allow access to grants and other government funding available exclusively to non-profits, and have certain exemptions from taxes. Or you may opt to run your business for-profit as a social enterprise or social business. A quick summary, for those who may not have encountered these terms before: social enterprises prioritize creating social or environmental benefits as much as, or more than, creating profit. Social businesses are less strictly defined for-profit businesses with a social conscience. Both social enterprises and social businesses often reinvest profits in their work, rather than primarily using dividends to benefit the company’s owners and shareholders.
Social enterprises can take advantage of what makes them special by setting up the business itself in a way that highlights and benefits from their commitment to social good. There are a number of alternative business structures that leverage a social enterprise’s mission.
Well-established options include forming as a cooperative or worker-owned business. These tend to be suited for retail or production environments, such as the common cooperative grocery or community farm, rather than service-oriented businesses. By choosing to establish the business as a cooperative, you are increasing your “DPI” by ensuring the profits of your business are reinvested into the community, instead of being funneled towards a few owners.
A new option for socially-minded businesses is pending in Massachusetts: a bill that would approve low-profit limited liability companies (L3Cs for short) has passed the State Senate and is currently under review in the House.
The main advantage of L3C status is that they’re able to access funding from both sides of the nonprofit/for-profit divide. L3Cs are eligible for grants from nonprofit organizations, as well as investment from private funders. Because L3Cs are permitted to make a profit, provided that the financial return is a lower priority than the business’s social mission, they can offer dividends to private investors. Pending regulations proposed by the IRS in 2012, nonprofits may soon be able to invest their program-related investments — the 5% of assets a nonprofit must contribute to a charitable body every year to retain its tax-exempt status –– in L3Cs, offering another source of funding unavailable to traditional for-profit corporations. The potential downside of the L3C is that private citizens wouldn’t be able to write off their contributions as they would to an ordinary charity/non-profit.
Another new option for social enterprises, including L3Cs, is to gain benefit corporation, or (slightly different) Certified B-Corp, status. The first option, a benefit corporation, is a legal entity currently permitted in twelve states, and recently approved by the Massachusetts Legislature in December 2012. While there aren’t any tax benefits or increased access to funding, benefit corporations can use their adherence to a higher standard of accountability and social and environmental impact as a marketing tool for potential customers or investors; having the mission built into the framework of the business also helps to legitimize decisions motivated more by social consciousness and environmental impact than the bottom line. In order to publicize their activities, benefit corporations are required to release an annual report detailing their social and environmental performance, as well as their fiscal details. Much more detailed legal information is available from the Benefit Corp Information Center.
Then there’s the other kind of B-corp. While plain benefit corporations are a specific legal entity, Certified B-Corp status is a third-party certification developed and administered by B-Lab, an independent company. According to B-Lab, B-Corp certification “is to sustainable business what Fair Trade certification is to coffee or USDA Organic certification is to milk”. The application process involves an assessment of social and environmental impact, and a site inspection; the application must be renewed every two years. Again, while getting the certification is useful primarily a marketing technique indicating high standards of transparency and commitment to a social mission, there are other perks. B-Lab underwrites advertising costs, and many B-Corp members offer discounts on services to one another.
Finally, for-profits businesses can access the benefits of non-profit status by constituting a non-profit foundation as a subsidiary. This type of hybrid business models are often used by larger corporations with charitable causes in mind.
If you’re unsure which legal structure is right for your business, feel free to give us a call, and find some further reading here.