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Exploration: a new social enterprise legal form for Canada CCEDNet - - PowerPoint PPT Presentation
Exploration: a new social enterprise legal form for Canada CCEDNet - - PowerPoint PPT Presentation
Exploration: a new social enterprise legal form for Canada CCEDNet Conference June 2009 With Richard Bridge and Stacey Corriveau Welcome! Who is in the room today? History: ARISE social enterprise 2005 advocacy started by FVCSE in 2005 other SE
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History: ARISE social enterprise 2005 advocacy started by FVCSE in 2005
- ther SE examples through the Centre for SE
Muttart Foundation summit for SE – early 2008 Coast Capital Savings project 2008 ‐ 2009
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2008: Enter charities lawyer Richard Bridge ☺
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The Community Interest Company
- r ‘CIC’
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A new social enterprise legal form for Canada Characteristics of the UK ‘Community Interest Company’ or ‘CIC’
Social enterprises are defined in the (UK) Prime Minister’s Strategy Report as ‘organizations which, like mainstream businesses, trade in
- rder to build long‐term sustainability, but
which operate for a social purpose and use their profits to this end’.
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A new social enterprise legal form for Canada Characteristics of the UK ‘Community Interest Company’ or ‘CIC’
In 2005, the Community Interest Company (CIC) was introduced in England, Scotland, and Wales, specifically via legislative changes to the Companies Act 1985. CIC’s came into being in Northern Ireland in 2007, via legislative changes to the Companies Order 1986.
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A new social enterprise legal form for Canada Characteristics of the UK ‘Community Interest Company’ or ‘CIC’
Other than the special attributes detailed below, a CIC operates exactly as a traditional company (i.e. corporation). This means that it is a separate legal entity, can enter into agreements and contracts in its own right, and does not cease to exist when shareholder changes occur.
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A new social enterprise legal form for Canada Characteristics of the UK ‘Community Interest Company’ or ‘CIC’
- The CIC is essentially a ‘not‐for‐profit
company’ (or profit‐for‐community company) that ‘combines the pursuit of a social purpose with commercial activities’.
- Within the first year of introduction, over 360
CIC’s were formed within the UK. Now, there are over 2,700 CIC’s.
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A new social enterprise legal form for Canada Characteristics of the UK ‘Community Interest Company’ or ‘CIC’
- The CIC is simple and inexpensive to
incorporate, and features a low level of
- regulation. Its structure is that of a limited
liability company, and it can be formed ‘new’, or can be converted from existing business forms (e.g. a standard corporation can switch to a CIC).
- Typically, those choosing the CIC form are
individuals, businesses, those operating community‐based projects, and community groups.
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A new social enterprise legal form for Canada Characteristics of the UK ‘Community Interest Company’ or ‘CIC’
As corporations feature ‘Limited’ or ‘Incorporated’ at the end of their legal names, CIC’s choose either ‘CIC’ or ‘Community Interest Company’ as their company suffix. In addition to the purpose of meeting legal naming requirements, the suffix is intended to immediately identify the venture as a social business to the financing and purchasing public.
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A new social enterprise legal form for Canada Characteristics of the UK ‘Community Interest Company’ or ‘CIC’
As a means to inject cash into the venture, a CIC can sell investment shares. Windfall payments to shareholders are not allowed. There is a dividend cap on returns on shareholder investment, for the purpose of ensuring that an adequate level of resources remain in the CIC, and/or flow to community benefit.
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A new social enterprise legal form for Canada Characteristics of the UK ‘Community Interest Company’ or ‘CIC’
The dividend cap is set at a maximum of 4% above the Bank of England’s base lending rate (Canadian ‘prime’), in terms of the paid up value of the share (this is called ‘maximum dividend cap’). The CIC is prohibited from declaring a dividend total per year that exceeds 35% of the CIC’s distributable profits (this is referred to as the ‘aggregate dividend cap’).
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A new social enterprise legal form for Canada Characteristics of the UK ‘Community Interest Company’ or ‘CIC’
In cases of dissolution, assets flow to the community, not shareholders or other private
- interests. The asset lock is a key feature of the
- CIC. The CIC is prohibited from liquidating its
assets at less than market value, unless they are being directed to another asset locked entity (including registered charities) or for community
- benefit. CIC’s may adopt even tighter asset lock
rules within their articles. Assets are however, allowed to be depleted in order to satisfy debts incurred during the regular operation of the enterprise.
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A new social enterprise legal form for Canada Characteristics of the UK ‘Community Interest Company’ or ‘CIC’
It should be noted that the light regulation and simple set‐up exist mainly due to the fact that the CIC is not a registered charity. The other side of this reality is the fact that net profits
- f CIC’s are taxed at corporate rates. This is
the main reason why charities don’t convert to the CIC form.
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A new social enterprise legal form for Canada Characteristics of the UK ‘Community Interest Company’ or ‘CIC’
The ‘community’ being served can be place‐based,
- r sectoral. It is generally expected that the
community being served by the CIC is broader than the members of the CIC itself. If the venture does not meet the ‘community interest test’ (that is, if the mandate of the enterprise does not
- perate out of community interest), then the CIC
legal form cannot be conferred upon it. A brief raison d’être, called a Community Interest Statement, must be provided to the CIC Regulator, in order for a decision to be rendered vis‐à‐vis whether the CIC form can be used.
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A new social enterprise legal form for Canada Characteristics of the UK ‘Community Interest Company’ or ‘CIC’
Broad community accountability is built into the CIC framework via the requirement to file an annual CIC report with respect to its
- perations and activities, which is filed on the
public record. The main sections of this report are: activities, stakeholder consultation, Directors’ remuneration, asset transfers other than for full consideration, and dividends / interest paid.
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A new social enterprise legal form for Canada Characteristics of the UK ‘Community Interest Company’ or ‘CIC’
In too many cases, the non‐profit / charity impediments to remuneration for service on Boards of Directors (and therefore playing a governance role) forces organization founders to choose between remuneration and governance. In the case of the CIC, founders and CEO’s can serve on the Board, and Directors can receive reasonable remuneration. The CIC literature also notes this as a positive incentive to attract the most suitable people for management and Directorship positions.
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A new social enterprise legal form for Canada Characteristics of the UK ‘Community Interest Company’ or ‘CIC’
The CIC legislation is currently undergoing revision by its original writer, based on feedback from three years of experience, and from those operating CIC’s.
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A new social enterprise legal form for Canada Characteristics of the UK ‘Community Interest Company’ or ‘CIC’
Among the changes being contemplated:
- A change is being considered to increase the
maximum percentage of profits that a CIC can distribute to investors from 35% to perhaps 70%.
- Similarly, the interest cap has been criticized as
too restrictive, and the suggestion has been made that the maximum rate of return that an investor can reap on a CIC investment should be increased from 4% above the Bank of England’s base lending rate to up to 20%.
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A new social enterprise legal form for Canada Characteristics of the UK ‘Community Interest Company’ or ‘CIC’
More changes being contemplated:
- There is interest in changing the tax treatment of
investments in CIC’s to make them a more attractive investment. Specific reform proposals include:
– Allowing CIC investors a tax write‐off against their income tax at the basic rate of 20%. – Reducing the rate of investor taxation to a maximum
- f 20% on income received from the CIC as opposed
to the maximum of 40%.
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A new social enterprise legal form for Canada Characteristics of the UK ‘Community Interest Company’ or ‘CIC’
Other possible limitations to date:
- It may also be that the corporate‐like CIC form presents
barriers to accessing start‐up grants.
- To date, there has been little uptake on brand, from the
point of view of purchaser procurement of CIC goods and
- services. Reports from the UK are that there hasn’t been a
big enough budget for promoting the CIC brand. Further, the CIC brand may be too narrow for social enterprise promotion, since it excludes charities trading under their
- wn organizational banner).
- So far, there has been no systematic tracking of CIC
impacts such as jobs created, and savings on the social safety net.
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The Low‐Profit Limited Liability Company
- r ‘L3C’
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A new social enterprise legal form for Canada Characteristics of the US ‘Low‐Profit Limited Liability Company’ or ‘L3C’
Unlike the CIC, the L3C is not a new legal form. Rather, it is a variation of the LLC, an already‐ recognized form in the United States. Where new CIC owners have stated that they spend much time explaining the nuances of the CIC form to financiers and the general public, no such explanation is required with the L3C.
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A new social enterprise legal form for Canada Characteristics of the US ‘Low‐Profit Limited Liability Company’ or ‘L3C’
The managers of the L3C will have the freedom and flexibility of a for profit but with marching
- rders to ensure that they maintain their non
profit souls.’ ‐‐Robert Lang, L3C creator
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A new social enterprise legal form for Canada Characteristics of the US ‘Low‐Profit Limited Liability Company’ or ‘L3C’
Robert Lang explains the form thus: ‘The LLC is an extremely successful business form that combines the best features of a partnership with the best features of a corporation: liability protection, and the ability to sell itself in pieces’. Unlike a corporation, owners are called members (rather than shareholders). Instead of (corporate) bylaws, LLC’s (and therefore, L3C’s) act under an operating agreement.
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A new social enterprise legal form for Canada Characteristics of the US ‘Low‐Profit Limited Liability Company’ or ‘L3C’
Each member of the L3C is taxed according to their own tax situation (corporations would be taxed on L3C net profits at the corporate tax rate, individuals at the personal tax rate, charities at zero, etc.).
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A new social enterprise legal form for Canada Characteristics of the US ‘Low‐Profit Limited Liability Company’ or ‘L3C’
Because of the flexibility of the operating agreement structure, each member can enjoy different powers and privileges. This would prove valuable in terms of hybrid ownership
- groups. Likewise, members can be passive or
directly involved in management, as per the conditions of the operating agreement.
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A new social enterprise legal form for Canada Characteristics of the US ‘Low‐Profit Limited Liability Company’ or ‘L3C’
The main feature of L3C’s is that they are accepted recipients of program‐related investments (PRI’s). These are loans flowed from American charitable foundations, with the expectation of below‐market (or zero) returns. The investment power of Canadian foundation assets are dwarfed by that of American foundations, so it is unlikely that a Canadian incarnation of a social enterprise form would contain such a high stress on PRI’s. Nevertheless, Canadian foundations are beginning to examine PRI possibilities, so it would prove helpful to have a structure standing by that can easily receive these loans.
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A new social enterprise legal form for Canada Characteristics of the US ‘Low‐Profit Limited Liability Company’ or ‘L3C’
Because the L3C can structure tranched (or layered) investments, some investments can receive below market (or zero) rates of returns (foundations, social responsible investors) while others can receive market rates of returns (traditional investors). Likewise, some investments (e.g. PRI’s) can be given ownership interests that are subordinate to the other investments (e.g. traditional investors). This tranched structure enables the attraction of a greater mix of financial backers, broadening the variety and numbers of potential investors. The highest risk investment need not receive the highest rate of return.
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A new social enterprise legal form for Canada Characteristics of the US ‘Low‐Profit Limited Liability Company’ or ‘L3C’
The next steps in L3C development are a move to federal acceptance (i.e. sanction in more states), beginning to attach tax incentives, advocating for L3C’s to be recipients of investments under the Community Reinvestment Act’, and to develop a roster of L3C’s.
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A new social enterprise legal form for Canada Characteristics of the US ‘Low‐Profit Limited Liability Company’ or ‘L3C’
Unlike the CIC, the L3C has no asset lock and no dividend cap. Branding has not been a priority to date. Robert Lang asserts that the impacts
- f the L3C activities in themselves will be the
most effective means of building awareness and confidence in the legal form.
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...a Canadian option!
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A new social enterprise legal form for Canada A Canadian opportunity...
These UK and US innovations are timely and very helpful guides for Canada. The social economy and community enterprises in Canada are very similar to those in the UK and the US. They have developed in the same way, they have the same enormous potential, and, until now, they faced the same basic legal limitations. Canada now has before it an opportunity to draw the best attributes from both legal structures, to create new federal legislation to enable social enterprise to flourish.
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A new social enterprise legal form for Canada A Canadian opportunity...
“Social Enterprise” is not a legal expression in
- Canada. There is no national or provincial
social enterprise act or regulation that defines it or gives it legal form or structure. It is not addressed in the voluminous federal Income Tax Act as something distinct and worthy of unique treatment.
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A new social enterprise legal form for Canada A Canadian opportunity...
Instead, social enterprises in Canada take a variety of different
- rganizational forms. They could operate as:
- A sole proprietorship or partnership registered under provincial
legislation.
- A corporation incorporated under either provincial or federal
legislation.
- A co‐operative incorporated provincially, or, if it is carrying on business
in more than one province, incorporated federally.
- A non‐profit organization incorporated under provincial “society” or
equivalent legislation, or under Part II of the Canada Corporations Act.
- A registered charity engaging in “related business.”
- A non‐profit or charity that owns a for‐profit business (which can take
different organizational forms).
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A new social enterprise legal form for Canada A Canadian opportunity...
Social enterprises are also being undertaken as programs, projects, joint ventures, or other agreements between any of the above legal structures or individuals.
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A new social enterprise legal form for Canada A Canadian opportunity...
- “Community Enterprise” is an alternative
name for organizations or ventures of this type that may better capture their essence as part of the middle ground between the state and the market. The two names are used interchangeably here. Unfortunately, “community enterprise” is also without legal meaning in Canada.
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A new social enterprise legal form for Canada A Canadian opportunity...
Operators of social or community enterprises have been creatively working with the available legal structures. But in Canada, there has been virtually no corresponding legislative
- r regulatory innovation. The organizational
infrastructure has not kept pace with the growing sophistication of community enterprise.
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A new social enterprise legal form for Canada A Canadian opportunity...
- Of the existing legal structures, only the co‐
- perative expressly embraces notions similar to
social enterprise. One of the internationally recognized principles shared by all co‐ops is “concern for community.” In some provinces with
- lder co‐operative legislation and regulatory
regimes, it is not possible for co‐ops to issue investment shares.
- The other legal structures do not fit as well with
the notion of social or community enterprise.
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A new social enterprise legal form for Canada A Canadian opportunity...
- Charities … must be established for exclusively
charitable purposes, and their ability to utilize market‐ based strategies is limited. Profit cannot flow from charities to members or directors. Such payments are strictly prohibited.
- Non‐profit organizations … cannot be incorporated for
the purpose of making profits, nor can they issue shares or pay dividends.
- Corporations … are designed to maximize profits for
shareholders, though shareholders may decide to forego some of that profit to enable the corporation to engage in activities that benefit the community.
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A new social enterprise legal form for Canada A Canadian opportunity...
A patchwork… The existing legal infrastructure utilized by Canada’s community enterprises is a
- patchwork. The quality of the relevant
legislative and regulatory systems varies from province to province. Most are badly dated, incomplete, and inadequate.
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A new social enterprise legal form for Canada A Canadian opportunity...
The best illustration of the dated nature of the legal infrastructure in this area is the Canada Corporations Act, which governs thousands of federally incorporated non‐profit
- rganizations and charities. It has changed
little since 1917, and is sadly inadequate. Briefly, it lacks detail and clarity on a range of important issues relating to governance, accountability, and administration.
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A new social enterprise legal form for Canada A Canadian opportunity...
Its failings are recognized by Corporations Canada and others in the federal government, and substantial work has been done in an attempt to modernize it. 2005 Bill C‐21 2008 Bill C‐62 / C‐4 But Bill C‐4 and its earlier iterations do not address the concept of social or community enterprise.
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A new social enterprise legal form for Canada A Canadian opportunity...
A registered charity considering engaging in community enterprise needs to be very careful not to run afoul the laws and policies administered by the Charities Directorate. Transgressions can result in loss of charitable
- status. It may be necessary for the charity to
create a separate corporate entity to house that
- activity. Extra care is needed in Ontario, and if
the charity in question is a private or public foundation.
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A new social enterprise legal form for Canada A Canadian opportunity...
Some concerns or doubts have been raised as to whether Canada should follow the UK or US leads and create a new structure for social or community enterprise. These include:
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A new social enterprise legal form for Canada A Canadian opportunity...
- 1. The current choices of organizational forms for social
enterprises in Canada are sufficient and there is no need to add another structural option. Social enterprises will continue to emerge and grow with or without the adoption of the changes proposed here. The expectation is that a Community Enterprise Act would create another choice of form, increased profile and recognition for the sector, and a focus for additional legislative and regulatory innovations. The addition of a new option in no way compromises existing structures. It merely offers another choice.
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A new social enterprise legal form for Canada A Canadian opportunity...
- 2. There are other higher priorities in terms of legislation to
support social enterprise. Favourable tax treatment and access to other sources of capital are more important. A Community Enterprise Act creates an opportunity for the Government of Canada to do more for social or community enterprise than just enable a new structure. Such an Act could reference favourable tax treatment or other public policies designed to help these entities to succeed. Additional innovations could take the form of additions or revisions to this Act in the future.
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A new social enterprise legal form for Canada A Canadian opportunity...
- 3. The creation of a new structure for social enterprise may
discredit or undermine the structures currently in use by social enterprises. This is not the case. The intention is for the proposed Community Enterprise Act to provide another choice of structure for social enterprises. The legislation could provide a definition of “Community Benefit” and a mechanism for entities incorporated under other federal or provincial legislation that meet that test to be eligible for favourable tax treatment and other incentives which the Government of Canada may decide to establish. Existing social enterprises would not be compelled to change their legal structure to comply with this new Act.
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A new social enterprise legal form for Canada A Canadian opportunity...
- 4. Loans or debt financing is adequate to finance social enterprise by non‐
profit organizations. In Canada and elsewhere, limited access to capital is a major obstacle to community or social enterprise, such as affordable housing, rural or urban community economic development, and environmental
- initiatives. Some social enterprises are capable of being self‐sufficient
- nce established, but too often do not succeed due to lack of access to
- capital. These projects often fall outside the realm of charity, so they
cannot be supported by charitable donations. For projects that can receive charitable donations, this source of funding is often too unpredictable and unsustainable to support many worthy community
- enterprises. In addition, community benefit projects are usually
undertaken by non‐profit organizations that lack the legal capacity to raise equity capital – that is, to raise funds in exchange for shares, the way that traditional business corporations do.
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A new social enterprise legal form for Canada A Canadian opportunity...
- 5. Social enterprises interested in share capital can incorporate
as for‐profit businesses. This is correct. Business corporations can be, and are, successfully used for community enterprise. But corporations are intended to maximize profits for shareholders rather than to advance community interests, and they are taxable at the same rate as other purely for‐profit corporations. A Community Enterprise Act would create another legal structure capable
- f raising funds through share capital offerings, and with
higher levels of community accountability.
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A new social enterprise legal form for Canada A Canadian opportunity...
- 6. The UK model is too complicated to be attractive to social
entrepreneurs or investors. There is no evidence that this is so. There are now approximately 2,400 Community Interest Companies in the UK, and the number is growing steadily. It does take time for innovations like this to catch on.
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A new social enterprise legal form for Canada A Canadian opportunity...
- 7. The UK model has received negative reviews. The dividend
cap is too restrictive, the reporting requirements are too
- nerous, and the tax treatment is not generous enough.
The fact that the UK has a head start of several years will be helpful in shaping the details of Canada’s Community Enterprise Act, as lessons learned from the UK experience can be addressed at the outset in Canada. At time of writing, for example, a formal review of the dividend cap is being undertaken by the CIC Regulator. Results from this investigation will prove useful to Canadian innovations.
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A new social enterprise legal form for Canada A Canadian opportunity...
- 8. We do not know whether there is any interest in a new
structure among existing social enterprises. This is correct. There is not yet any data regarding support for this proposal in Canada. Such data would inform the discussion on the issue. The first step is to build a case as is
- utlined in this paper. Such work has not previously existed.
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A new social enterprise legal form for Canada A Canadian opportunity...
- 9. The Ontario government is planning an overhaul of its non‐
profit law and regulations, and may provide helpful new
- pportunities for social enterprises. Care should be taken
not to complicate that potential progress by advocating a different new structure. It will be good news if Ontario decides to make progress in this
- area. This would not preclude the Government of Canada
from creating a Community Enterprise Act, nor would it prevent other provinces from doing something similar.
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A new social enterprise legal form for Canada A Canadian opportunity...
- 10. Work advocating for a new legal structure will be a
distraction from other social enterprise policy reform. This need not be the case. Efforts to establish a new legal structure can be made independently of other reforms, or in conjunction with them. The idea of a new legal structure may indeed bring new interest, energy, and focus to the infrastructure needs in this area.
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A new social enterprise legal form for Canada A Canadian opportunity...
Canada’s organizational or legal infrastructure has not kept pace with the progress made by our community
- enterprises. By adopting relatively modest and low‐
cost legislative and administrative reforms that draw lessons from innovations in the UK and the US, Canada can improve that infrastructure. This important incremental step forward could be part
- f a broader strategy to encourage more social
enterprises to help communities adapt to change, and address the challenges and opportunities that they face.
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A new social enterprise legal form for Canada A Canadian opportunity...
Recommendations:
- That the Government of Canada enact a Community
Enterprise Act, which draws upon the best of the recent legislative innovations in the UK and the US.
- That this Community Enterprise Act incorporate by
reference the modern governance, accountability, and administrative provisions that have been built into Bill C‐4, the existing replacement for the inadequate Canada Corporations Act.
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A new social enterprise legal form for Canada A Canadian opportunity...
Recommendations (continued):
- That this Community Enterprise Act enable new organizations to
incorporate as “Community Enterprises” – organizations similar to Community Interest Companies in the UK. They should have the capacity to issue shares to investors, subject to limitations on scope
- f activities and on investment returns, and a capital lock to ensure
that assets remain primarily for community benefit.
- That this Community Enterprise Act create an option for existing
social enterprises incorporated under the Canada Corporations Act to “migrate” either to Bill C‐4 as non‐profit organizations or charities, or to the Community Enterprise Act to become Community Enterprises.
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A new social enterprise legal form for Canada A Canadian opportunity...
Recommendations (continued):
- That this Community Enterprise Act should define
“community benefit” and provide a mechanism for entities incorporated under other federal or provincial legislation that meet that test to be eligible for favourable tax treatment and other incentives the Government of Canada may decide to establish.
- That specific legislative authority be granted to charitable
foundations to invest in Community Enterprises and other
- rganizations that meet the community benefit test and
that have purposes similar to the investing foundations.
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Questions?
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Discussion…
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