What is the Best Structure for Social Ventures?

September 4th, 2009

The SOCAP09 conference on social entrepreneurship has swamped my Twitter feed for most of this week and I had a chance to stop in Wednesday evening to check it out.  The conference is for people starting companies looking to do well by doing good.

Todd Johnson, a preeminent lawyer in this area, posed a question via Twitter last week about the best type of entity structure for social ventures.  It’s a good question and there are some very interesting developments in the staid realm of corporate law that can help these types of companies along.  At the same time, there is tremendous diversity in the types of businesses being created, so if I had to give a one-line answer it would be “whatever structure makes partner organizations yawn the most”.

That’s probably not tremendously helpful, so here is my quick survey of social venture entity structures.  I’ve posted on this topic before and will continue to revisit as the landscape changes.  If readers know of other entity structures, and especially if you have seen certain structures work well in specific environments, please leave a note in the comments.

Nonprofit.  With apologies to non-profits and their lawyers everywhere for collapsing an entire sector into a pithy sentence, what most differentiates a nonprofit from a for-profit company is that the nonprofit has no owners in the financial-return sense.  Benefits are potential tax deductions for donors to the business and pure focus on the mission without having to consider shareholder returns.  A major drawback is that if the mission changes and participants wish to take profits out of the business it can be difficult or impossible to do so.  I have worked with nonprofits only in passing, so I won’t go any further except to note that non-profits run the gamut from entirely donation-dependent organizations such as the General Assistance Advocacy Project I worked with in law school to significant revenue-generating businesses like Kiva.org.

L3C. This is a new flavor of for-profit entity intended to help charitable foundations make grants more easily.  I don’t do anything remotely like this kind of work, so I can’t speak much to it except to say that the L3C was designed to allow foundations to meet their Program Related Investment guidelines under federal tax law more easily.  The first L3C was adopted in Vermont in February 2008 and as of today (Sept 4, 2009) there are at least 6 states with similar statutes in effect or pending, so I will assume they fill a need and leave it to more knowledgeable people to advise further.

Plain Old Company.  In many cases this is a great option and all a social entrepreneur needs. A “regular” corporation or LLC is simple, well-understood and easy to form.  One drawback is that while the owner/managers can dedicate the business to social goals, there is nothing to prevent the mission from being overridden.  Many social venture experts look to Ben & Jerry’s acquisition by Unilever as an example of this shortcoming- the B&J Board had an offer that was financially rewarding, but there were apprehensions that Unilever would not retain B&J’s commitment to support communities around its stores.  In the end, the Board decided it did not have discretion to put social-welfare goals over shareholder returns and accepted the Unilever buyout.  Many of B&J’s social programs ended shortly thereafter.

B Corporation.  The good folks at B Labs are setting standards to address this problem, along with many others.  A B corporation is a “regular” corporation (or LLC or other entity) that has made a commitment its charter documents to consider factors other than shareholder returns in determining corporate actions, esp. environmental, community, social and employee welfare.  The benefit of this is that the Board can, if necessary, choose paths that may lead to a lower shareholder return if circumstances require.  The problem is that only 32 US states allow this type of language in corporate charters, so businesses in California and elsewhere need to incorporate in B-corp friendly states to get the full benefit.

Social Venture Company.  You may be able to see where this is going.  There are groups in California, Minnesota (I think) and possibly other states working on legislation to create a new type of entity that permits the broad-constituency language promoted by B corp and others.  Like England’s Community Interest Company, these entities would be separate from “plain old” corporations or LLCs by their commitment to work toward positive outcomes for shareholders and non-financial stakeholders.  We don’t know much about these proposed entities yet and many of the draft ideas are subject to change so there isn’t much to say about them currently.

Going back to the start of this post, I strongly believe that the best entity structure for a given project is the one that investors, donors and business partners can gloss over without thinking about much.  We don’t quite have a standardized approach that allows this yet.  With luck in a few more years we will.

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