Navigating and Structuring Social Enterprise Activities October 18, 2019 Kimberly Lowe Avisen Legal, P.A.
Business Entities Available Today For-Profit entities (entrepreneur; owners; ROI): • Business Corporations – stockholders – Limited Liability Companies - members – Cooperatives – members and stockholders – Partnerships - partners – Nonprofit entities (mission; no owners; prohibition pecuniary gain): • Nonprofit (or Nonstock) Corporations – Members and non-members • Nonprofit Limited Liability Companies – Members • Trusts – Trustees • Unincorporated Nonprofit Associations – Members • Benefit Corporations (and now LLCs) •
Vocabulary Nonprofit tax-exempt organization(s) • Assuming a nonprofit corporations formed under MN Statutes Chapter 317A – Determined by the IRS to be tax-exempt under 501(c)(3) or some other (c) – Parent – entity or organization that owns 100% of the “equity” or “membership” interests of • another organization which is a wholly-owned subsidiary of the parent Controlled subsidiary – where one entity owns less than 100% but more than 51% of another • organization Taxable Nonprofit Organization or Enterprise – pays taxes on income but is still operated • under a nonprofit statute Equity holder – a person or entity that owns the stock or membership interests of a for-profit • enterprise Attribution – when a tax “identity” of the parent or the subsidiary is attributed either from the • parent down to the subsidiary or from the subsidiary up to the parent Fee for Services – when an enterprise, regardless of “type” is paid for services rendered which • results in revenue Donative organization – enterprise funded by the gifts of others (United Way to GoFundMe) •
Socially “Conscious” Businesses • Social Enterprise (per Social Enterprise Alliance): – Addresses an intractable social need and serves the common good – Commercial activity strong revenue driver – Common good is its primary purpose • Sustainable Business = meets need of present & future generations • Triple Bottom Line = people, planet and profits
Differences between Nonprofits and Social Enterprises • Nonprofit = mission driven; no owners; can have “profit” but no person has a right to receive that profit. • Social enterprise’s social mission has primacy and its economic activity is a method of funding the social mission without an opportunity for the fruits of that activity to be distributed to individual investors
Social “Businesses” • A “social” business embeds some sort of “social” mission into its structure or go-to- market strategy • Social “purpose” is different than charitable purpose (this is actually a term “defined” by congress and the IRS)
Social By Sharing • “Social” because a for-profit business shares some or all of its profits with other charitable organizations or causes. • Examples of this type of social business include: – Finnegan’s Beer, which donates 100% of its profits to combat local hunger (give more than the tax code incents) – Tom’s Shoes, which donates one pair of shoes to someone in need for each pair purchased (BOGO) – Newman’s Own, 100% of Profits to Charity
Social by Selling Some enterprises claim to be social because of what they sell or to • whom they are selling . In the first case, the product or service itself, when used by • customers, results in a unique and compelling social (not just private) value. In the second case, a company may sell a conventional private good • but to a population that currently is not served by the market. Examples include: • Revolution Foods, which sells extraordinarily fresh, healthy meals to school – cafeterias in order to combat obesity and improve child health. Thedatabank or Software for Good, which sells software and IT services to – nonprofit organizations, which traditionally are under-served by the technology industry because they have lower purchasing power. D.Light Solar, which sells solar light and power products to people in the – developing world who do not currently have stable electricity.
Social By Sourcing Some enterprises claim to be social because of “how” they make their products or • services. Common ways for ventures to source socially include: • using new environmentally friendly processes, – employing vulnerable populations, – using minority owned suppliers, – exclusive use of sustainable materials, and – through public co-production processes. – Some examples include: • Ten Thousand Villages, which sells products that are sourced from individual artisans – from the developing world, using all natural and environmentally sustainable materials. Cookie Cart, which employs and provides job training to at-risk teenagers (charity that – sells cookies) Rebuild Resources, which employs and provides job training to former felons and – recovering addicts. Patagonia, which insists on very high environmental standards in its product supply – chain.
“Benefit” Corporation • A “Benefit” Corporation is: – For-profit business (with owners and an ROI) that has an additional purpose to create some sort “a material positive impact on society and/or the environment” (B Lab Definition) – Directors have a duty to consider the effects of their decisions on all constituencies – Business must report how it creates a social benefit
Benefit Corporation vs. B Lab Issue Benefit Corporations Certified B Corporations Accountability Directors required to consider impact on all Same stakeholders Transparency Must publish public report of overall social Same and environmental performance assessed against a third party standard* Performance Self-reported Must achieve minimum verified score on B Impact Assessment Recertification required every two years against evolving standard Availability Available for corporations only in 33 U.S. Available to every business regardless of corporate structure, state, or states country of incorporation Cost State filing fees from $70-$200 B Lab certification fees from $500 to $50,000/year, based on revenues Role of B Lab Developed Model Legislation, works for its Certifying body and supporting 501c3, offering access to Certified B passage and use, offers free reporting tool Corporation logo, portfolio of services, and vibrant community of practice to meet transparency requirements; No among B Corps; To learn more about B Corp certification, role in oversight visit www.bcorporation.net.
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