Quick Review of Social Benefit Business Structures

October 15th, 2008

I have been fortunate to get involved lately with a couple of social benefit businesses.  These are companies formed to bring on investment, have shareholders and turn a profit- and the larger the better- but also to explicitly serve a social purpose that goes beyond mere shareholder returns.  Working with these companies has caused me to review a variety of business types that work for social benefit companies in various ways.  Here is an ultra-quick summary of the several types I have found.

Non-profit. I don’t work with non-profits, but I am listing their characteristics here for comparison purposes.  A non-profit has no owners/shareholders, is dedicated to social goals and can only use the money it makes for programmatic and charitable goals.  State authorities can and do enforce these requirements.

Plain Old Corporation with Social Aims. This is the simplest type of for-profit social benefit entity.  A corporation is created, does business and uses some of its time, capital or other resources to pursue social goals.  Ben & Jerry’s (pre-sale to Unilever) is many people’s favorite example of this type of company.  The advantage of the entity type is that it is simple for everyone to understand.  One disadvantage is that in many states as well, the Board is constrained from considering non-shareholder interests in deciding on courses of action.  It is important to note as well that the social purpose can be changed relatively easily if management decides to go in a different direction.  This could be a positive or a negative depending on circumstances.

The B Corporation.  The B corporation name distills years of work refining the principles above and packages them with a title.  B corporations build specific provisions into their formative documents that give the Board discretion to consider a variety of interests beyond shareholder return.  For maximum effect, corporations must form themselves in a state that allows such flexibility.  In other respects, though, B corporations are just like plain-old C corporations: they can take investment, turn profit and have no state-mandated restrictions on how to operate.  The social benefit goals are also purely voluntary.  A B corp could turn into a regular C corp if it so chose.

The Low Profit LLC or L3C. This is a brand new entity type that exists only in Vermont so far as I know.  Unlike a nonprofit it is permitted to have shareholders (technically Members since it is an LLC) and to distribute profits to them.  The main goal seems to be to make it simple for foundations to put money into programmatic investments, generate returns and eventually trade in and out of different program vehicles.

The Community Interest Company.  CICs are a mix of all of these.  They combine the explicit social purpose of the B corporation with a regulatory layer similar to a non-profit or possibly an L3C.  Companies choosing social benefit are not as closely regulated as non-profits, but are nevertheless required to maintain their devotion to the social purpose.  They can take investment and issue shares, but an “asset lock” restricts the company’s ability to transfer assets to a purely for-profit entity.  CICs are also an English form of entity, so American social entrepreneurs need not apply.

Which entity is best for a given situation?  It depends on what the goals are, of course.  Simple is good, but sometimes entrepreneurs want to make a stronger statement than the plain old C corp, so a B corp is the next step.  The L3C looks to be a special-purpose entity and we will have to wait and see a bit how it evolves.  CICs are an interesting model and it is possible that something like it could come into existence in the US.  I worry a little that the asset lock commits a business irrevocably down a certain path and makes it hard to adapt if market conditions dictate a different path.

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