Social Entrepreneurship: Nonprofits Should Consider These For-Profit Subsidiaries

If you are an aspiring social entrepreneur here are three hybrid business forms that may be right for you.


It is no secret that building a strong reputation is critical to a business’s success, and social entrepreneurship is trendy. A number of companies, following in the footsteps of Toms, Warby Parker, and others have built brands and brand loyalty by linking the sale of their products with a social cause. Research published by the Philanthropy News Digest demonstrates that consumers, in particular Millennials, are increasingly making purchases based on a company’s support of a social mission.

Although critics argue the concept of “doing good to do well” is simply a corporate public relations mantra, some prominent business thinkers see it as a necessity for long-term viability and a way to reshape our broken capitalist system. The emphasis on creating shared value, popularized by Michael Porter and Mark Kramer in a 2011 Harvard Business Review post, advocates for the breakdown of barriers between organizations dedicated to profit and those dedicated to social impact.

Blurring the line between pure profit maximization and pure social mission, however, is not without its legal ramifications. As both historic and recent lawsuits demonstrate, corporate leaders can find themselves facing lawsuits from shareholders for failing to maximize profits. The possibility of multimillion dollar lawsuits or hostile takeovers is enough to scare even the most dedicated social entrepreneur.

In both Canada and the U.S., state legislatures have responded by expanding organizational options to include various hybrids. These hybrids are variations on the traditional corporate and business entities designed to provide greater organizational flexibility.

If you are an aspiring social entrepreneur with a new business idea or an existing charity that needs a for-profit subsidiary, below are three hybrid business forms that may be right for you:

 

  1. Public Benefit Corporation (B Corp)

    As Nolo.com explains, “More companies are becoming concerned about how their business activities will affect the environment and the well being of their employees.  Taking these considerations into account when operating a for-profit business does not always lead to higher profits.  In fact, many business decisions that positively affect the environment and employees can cost more and result in lower profits.” Hence the need for the B Corp, a modification of the traditional corporate form and the most widely adopted hybrid model; 24 states have such laws on the books.

    “In general, registering as a benefit corporation lets a company enshrine certain goals in its founding documents, like donating a set percentage of profits to charity or working only with environmentally responsible suppliers.” (Source: NY Times) Although not dramatically different than traditional corporations, B Corps have three notable variations in purpose, liability and transparency.

    Unlike traditional corporate entities, a B Corp requires consideration of environment, community, employees and suppliers in its corporate purpose and decision-making. This societal purpose shields B Corps from liability for failing to maximize value for shareholders. B Corps, however, are subject to greater transparency requirements than traditional corporations. B Corps must publish a detailed Public Benefit Report for public review and inspection. Failure to achieve a public benefit can result in enforcement proceedings reviewed under a third-party standard.

  2. Flexible Purpose Corporation (Flex C Corp)

    Whereas the B Corp requires a general public benefit, the Flex C enables a company to specify a “special purpose” in its articles of incorporation. Deborah Sweeney, the CEO of MyCorporation, explains that while “Flex C is a corporate structure .  . . B Corp is a certification from B Lab – a third party who audits all the companies it certifies.” (Source: TriplePundit) Companies have significant leeway in determining the specific purpose — ranging from charitable to public purposes. The chosen special purpose becomes the company’s priority. They are required to release reports detailing their adherence to it. In addition, under Flex C, the company has the “flexibility” to create the various mechanisms by which its specific purpose will be reviewed.

  3. Low-Profit Limited Liability Corporation (L3C)

    The L3C combines nonprofit and for-profit organizational forms. Unlike a traditional LLC, the L3C is primarily dedicated to a charitable or educational purpose and only secondarily dedicated to generating some profit. In contrast to non-profits, the L3C is free to distribute the profits to its members/owners. A significant advantage of this form is to ensure that your company is eligible to receive program-related investments (PRI’s) from foundations and donor-directed funds.

Whether you have already selected a business form or are lost in the expanding sea of options, it is imperative to enlist a lawyer to help organize your business. By explaining your business plan, anticipated sources of capital and goals, a lawyer can determine what form is right for you.

 

This article has been edited and condensed.

Basha Rubin is the CEO of Priori Legal, an online marketplace connecting businesses with a network of vetted lawyers at transparent, below-market and fixed rates. She speaks and writes extensively on how technology and innovation is changing – and will change – the market for legal services. Her writing has been featured in Forbes, Entrepreneur, Inc, Women 2.0 and Under30CEO. She holds a J.D. from Yale Law School and a B.A. from Yale College, and is a member of the New York Bar. She also sits on the boards of A Blade of Grass and the Rubin Museum of Art. A version of this post originally appeared on the author’s blog. Connect with @basharubin on Twitter.

 

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