15
Oct
10

Social Enterprise and Alternative Business Structures

I have been reading a few books by Muhammad Yunus (one of my heroes!), who pioneered microcredit , is the founder of the Grameen Bank and a 2006 Nobel Peace Prize winner. I just finished a book entitled ‘Building Social Business – The new kind of capital that serves humanity’s most pressing needs’. In the book, Muhammad Yunus (MY) proposes a new business model for serving the poor through social business. This is the concept whereby a business is operated with the goal of being self-sustaining but rather than having a profit motive, would primarily exist for a social benefit motive such as to benefit the poor. According to MY, this new model is dynamic and effective in serving the poor (and ultimately empowering the poor to self-sustainability) as it can overcome limitations of the typical business structures that exist within a capitalistic economic model for profit-maximization (in the form of corporations) or for maximum tax benefit (in the form of a non-profit organization). In addition to this, the social business model can help the poor to become self-sustainable.

MY differentiates social entrepreneurship and social business by these definitions:

‘Social entrepreneurship relates to a person. It describes an initiative of social consequences created by an entrepreneur with a social vision. This initiative may be a non-economic initiative, a charity initiative, or a business initiative with our without personal profit. Some social entrepreneurs house their projects within traditional non-governmental organizations (NGOs), while others are involved in for-profit activities. In contrast with social entrepreneurship, social business is a very specific type of business – a non-loss, non-dividend company with a social objective. A social business may pursue goals similar to those sought by some social entrepreneurs, but the specific business structure of social business makes it distinctive and unique†.

 

A particular section in the book entitled ‘legal and financial frameworks for social business’ interested me the most. In it MY describes emerging alternative structures through which a social business can be organized. Here is a summary of those structures:

1. L3C (Low Profit Limited Liability Company) –

An L3C is fundamentally a for-profit company that pursues a social purpose. An L3C is a limited liability company organized under state laws that meets the following criteria upon formation and continuously during the life of the organization:
– The company significantly furthers the accomplishment of one or more charitable or educational purposes, and would not have been formed but for the company’s relationship to the accomplishment of charitable or educational purposes.
– No significant purpose of the company is the production of income or the appreciation of property; provided, however, that the fact that the company produces significant income or capital appreciation is not, in the absence of other factors, conclusive evidence of a significant purpose involving the production of income or the appreciation of property.
– The company is not organized to accomplish one or more political or legislative purposes.
L3Cs are not exempt from federal or state tax and investments in L3Cs are not tax-deductible. Like a traditional LLC, L3Cs are pass-through entities, whereby income, expenses, gains and losses ‘pass through’ to L3C members.
The states that currently recognize the L3C structure are the following: Vermont, Michigan, Utah, Wyoming, Illinois, North Carolina, Maine, and Louisiana. Legislation allowing the formation of L3Cs is currently being considered in Colorado, Georgia, Oregon, North Dakota, Tennessee and Montana.

An expanded definition of L3Cs can be found on Wikipedia

2. Community Interest Company (CIC) –
The CIC concept was introduced in 2005 in the UK for ‘social enterprises’ under the Companies Act 2004. Social enterprises are those organizations pursuing social objectives, such as environmental improvement, community transport, fair trade, etc. CICs are committed to providing benefits to society rather than enriching owners or shareholders. A government regulator is responsible for examining each proposed CIC to make sure it passes what’s called the community interest test. This means satisfying the regulator that the purposes of the CIC ‘could be regarded by a reasonable person being in the community or wider public interest’. The benefits delivered by the CIC must also not be restricted to a very small or select group (to ensure that someone does not try to label a profit-maximizing company as a CIC by claiming that it has been created to provide ‘social benefits’ to a specially defined group of insiders).
The CIC does not enjoy the tax benefits that a charity gets. A CIC pays taxes on its revenues in much the same way as any ordinary business. Also, the assets held or generated by the CIC, including any surplus of revenues over expenses, are subject to what is called an asset lock. This is a legal requirement that the assets of the CIC be used solely for community benefits. A CIC has one or more owners. A charity can own a CIC; so can an individual, a group, or another company†.

3. B Corporation –
There is no law defining the B Corporation or specifying any special regulations that apply to it. The idea of the B corporation was created by an organization called B lab, which was founded in June 2006 by a young social entrepreneur named Coen Gilbert, who came up with the name B corporation using the analogy of C and S corporations, which are legal structures named after specific provisions in the U.S. tax code. However, the ‘B’ in B corporation does not refer to the tax code – instead, it stands for ‘beneficial’, since a B corporation is supposed to provide benefits to the community in which it operates†.

According to its website B corporations are corporations that use the power of business to solve social and environmental problems. They are unlike traditional responsible businesses because they meet comprehensive and transparent social and environmental performance standards, institutionalize stakeholder interests, and build collective voice through the power of a unifying brand.

According to the rules established by B lab, a company that wants to be ‘officially’ designated a B corporation must include language in its governing documents (for example, its articles of incorporation, partnership agreement, or company bylaws) that specifically states that company directors may consider not just the financial interests of shareholders but also the welfare of many other ‘stakeholders’, such as employees, customers, the community, and even the natural environment. The idea is to formally acknowledge the company’s responsibilities to society alongside its economic responsibility to make a profit for investors – and thereby shield the company’s managers and directors from legal attacks or investor rebellion when they make choices that benefit society while possibly diminishing profits. B lab offers a rating system that allows companies to measure their own environmental and social performance by answering a series of survey questions. The results yield a point score, and only companies that achieve a ‘passing’ score (currently set at 80 out of a possible 200) are eligible to be designated as B corporations. The goals is to make the B corporation ‘brand’ into a valuable form of recognition that enables everyone – customers, investors, employees, and the general public – to recognize companies that have made a real commitment to environmental and social sustainability†.

In thinking through the needs of World Vision and the constant emerging diverse partnerships that originate in efforts to serve the poor, it left me wondering if some of these structures would be worth considering when structuring these partnerships and joint ventures. The rise in partnerships between charities and businesses is happening globally and as noted in a publication entitled ‘Canadian Registered Charities – Business Activities and Social Enterprise’, these partnerships are occurring for several reasons including, (a) charities that are attempting to run in a more ‘business-like manner’, (b) charities that are developing revenue streams through increased sales of goods and services, and (c) charities that are joining forces with businesses to undertake joint marketing initiatives and cross-promotions.

Change in the nonprofit world seems to be the only constant. Are we ready to embrace it?

Other resources:
Canadian Registered Charities – Business Activities and Social Enterprise

Footnotes:
†: Muhammad Yunus, Building Social Business – The new kind of capital that serves humanity’s most pressing need

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3 Responses to “Social Enterprise and Alternative Business Structures”


  1. October 19, 2010 at 5:04 am

    The P-CED Model always gets missed. It was conceived in the US in 1996 and incorporated in the UK as a guarantee company with no shares in March 2004.

    “The P-CED concept is to create new businesses that do things differently from their inception, and perhaps modify existing businesses that want to do it. This business model entails doing exactly the same things by which any business is set up and conducted in the free-market system of economics. The only difference is this: that at least fifty percent of profits go to stimulate a given local economy, instead of going to private hands. In effect, the business would operate in much the same manner as a non-profit organization. The only restrictions are the normal terms and conditions of free-enterprise. If a corporation wants to donate a portion of profits to its local community, it can do so, be it one percent, five percent, or even fifty percent. There is no one to protest or dictate otherwise, except a board of directors and stockholders. This is not a small consideration, since most boards and stockholders would object. But, if an arrangement has been made with said stockholders and directors such that this direction of profits is entirely the point, then no one will object. The corporate charter can require that these monies be directed into community development funds, such as a permanent, irrevocable trust fund. The trust fund, in turn, would be under the oversight of a board of directors made up of employees and community leaders. ”

    http://www.p-ced.com/1/about/history/

  2. November 1, 2010 at 10:00 pm

    Here are some articles regarding Social Entrepreneurship and legal structures that came out a few days after this blog post:

    The Noncorporate Organization (Harvard Business Review Blog Post) –
    http://blogs.hbr.org/hbr/meyer-kirby/2010/10/the-noncorporate-organization.html

    Hybrid Model for Nonprofits Hits Snags (NYT article) – http://www.nytimes.com/2010/10/26/business/26hybrid.html?_r=2&pagewanted=all


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