The Alliance for Social Enterprise shares useful information about the social enterprise sector. The social enterprise is structured as a department or profit center within the parent organization. The social enterprise may (or may not) physically share the space with the parent company. From a legal, financial, management and governance perspective, the company is internal to its not-for-profit parent company. Systems, back office, employees and leadership are integrated. Social enterprises, which are incorporated as a “public company”, have the option of distributing profits to shareholders; These profitable structures can often be an attractive offer for private investors. However, the distribution of profits can often lead to a financial conflict of interest between the individual social entrepreneur and a wider group of shareholders and excludes the possibility of obtaining funding from funders. A California-based social enterprise has six main options to choose from. California has two forms of businesses designed specifically for social enterprises, the Benefit Corporation and the Social Purpose Corporation. A social enterprise may also use suitable forms of non-profit organizations, limited liability companies and traditional companies to achieve its objectives. Finally, a social enterprise can also operate as a business without legal personality, such as a sole proprietorship or partnership, and obtain third-party certification for its commitment to solving social and environmental problems. Limited liability companies are free to distribute their profits to members in the form of dividends.
Social enterprises with this structure may also inscribe in their constitution that profits are not distributed but reinvested in the business, although some may choose to distribute the profits to charities or the community they serve. The Constitution also regulates the distribution of assets when the company is closed/liquidated. These assets may be distributed to other companies performing similar work or to guarantors. This protection is particularly attractive to trusts and public contractors. Pros: Ability to attract venture capital funding, pay high price for good talent, and invest in technology and infrastructure. The following diagrams illustrate the structure of the social enterprise in relation to the parent organization. Choosing a structure that allows you to receive short-term grants can prevent you from accessing investment if you want to expand your business in the future. Therefore, you must first determine the form of financing you are most likely to rely on in the long term and choose a legal structure that allows you to access it.
Not-for-profit organizations – The traditional not-for-profit organization is considered a “public good” or public property. Not-for-profit organizations may own a for-profit or not-for-profit social enterprise subsidiary. In the case of a for-profit enterprise, the not-for-profit organization may sell the subsidiary or its assets or raise equity for new investments; while the non-profit subsidiary can raise charitable funds, but not equity, and is subject to donor requirements and charitable laws regarding ownership of assets and use of income. The non-profit parent company of the non-profit subsidiary can acquire the assets of the social enterprise if the business goes bankrupt or closes. “Three characteristics set a social enterprise apart from other types of businesses, non-profits and government agencies: there is no single business structure you have to use to start a social enterprise – there are many opportunities. You may want to consider forming a limited liability company (LLC), a traditional company, or a corporation. Sometimes your social enterprise can also be better served with a traditional nonprofit business structure. Benevolent owners – Private ownership of social enterprises generally falls under the heading of socially responsible enterprises. In developed countries, there are a growing number of small businesses that have been created to contribute to a social cause and generate income for their owners. In the United States, practitioners have founded their own industry organization: Social Venture Network. These businesses operate in accordance with standard small business laws. More information is also available on the Business for Social Responsibility website.
Charities seeking a sustainable and diversified income tend to create corporate-owned business ventures that operate as social enterprises. Most charities are registered with the Charities Commission, but charities with particularly low turnover or certain charities that operate under the umbrella of a larger charity may be exempt from the registration requirement. These organisations can contact HMRC directly for tax exemption and relief for charities. Sole proprietorships – in many emerging markets, social enterprises are owned by a single person to circumvent laws that restrict non-profit business activities. In this situation, the owner of the social enterprise is often the CEO of the parent organization or a member of its board of directors. This structure carries the risk that the company will be cannibalized by an unscrupulous owner. Unfortunately, in many countries, this is the only property option available until the legal environment allows. These companies, formed to support a non-profit organization, are subject to local taxes and laws that apply to private companies. However, the not-for-profit corporation can be customized for certain social purposes of the business by creating a for-profit subsidiary that generates profits to fund the non-profit corporation. Another advantage of this hybrid structure is that the for-profit subsidiary can attract mission-oriented investors while the nonprofit retains its ability to receive donations without compromising the nonprofit`s tax-exempt status. Succession planning – It is difficult to maintain a company`s social and environmental objectives after the company leaves or sells because these objectives are not part of the company`s DNA.
There are other ways to maintain mission-oriented objectives by creating different classes of shares (e.g., super voting shares) and including special provisions in bylaws. These methods can be complex and a lawyer should be consulted. Our social enterprise firm helps entrepreneurs understand the opportunities and challenges of this new landscape. Private ownership of a social enterprise offers benefits of equity financing, clear ownership and valuation of assets, as well as the freedom to sell the business. Conflicts can arise between the fundamental motives for making a profit and the mission.