Social enterprises are amazing ways to address social or environmental issues, so, what’s the best way to set one up?!
This article is intended to give some guidance on business entity selection if you want to form a social enterprise. Your business model matters more than anything when it comes to running a successful social enterprise. But certain legal structures coupled with detailed governing documents can definitely make it easier for your company to stay in line with its social cause or mission. Here’s the rundown of legal entity types you could choose as the vehicle to operate your business.
For-profit corporation (with third party certification)
Social enterprises can be set up by forming a traditional corporation and then adapting the governing documents to implement the mission driven objectives of your social enterprise. Often times, right from the gate, the founders will adopt provisions that require oversight from a third party to assess (and, certify) adherence with the mission driven objectives of the company.
While the corporate structure IS the only way to fold in many investors into the company, the truth is that choosing to be a corporation can add a layer of complication. You see, the folks running the corporation (you and your other founders) are actually legally obligated to the shareholders (your investors) to maximize shareholder profit. I’ll say that again, if you aren’t maximizing shareholder profits intentionally and all the time, then you could be violating certain laws that govern corporations. I know, it’s super annoying, but it is a reality. In short…the corporate infrastructure makes it tricky to focus on social causes because, by law, the directors must maximize profits. And maximizing profits might sometimes come at the expense of the social mission of the corporation.
Benefit Corp or B-Corp
Forming a B-corp might be a better way to run a social enterprise, and good news–as of March 24, 2021, B-corps are recognized in Ohio!
Benefit corporations became a thing around 2010 when many companies wanted to demonstrate their commitment to the public good via pursuing missions pointed at addressing a social or environmental cause. Because the typical corporate structure does not always work well if the goal is to pursue a social cause above sheer profits, the B Corp was formed. A benefit corporation is “a corporation that sets forth in its articles of incorporation one or more beneficial purposes among the purposes for which the corporation is formed.” Being organized as a benefit corporation makes it clear to shareholders that the corporation intends to take into account environmental and/or social impact, and not just maximize profit. Stating the mission or cause in your articles does not require that you prioritize the beneficial purpose at all times above all other factors, but it does require that the beneficial purpose always be considered by the directors when decision are being made.
Limited Liability Company or LLC (with third party certification)
A social enterprise can be formed as a limited liability company, and you can use third party certification to help solidify the commitment to your social cause. One of the biggest benefits of the LLC structure is the flexibility afforded to management. The founders can draft an operating agreement to include accountability measures that are self-imposed and baked into the company governance. LLC is a tax friendlier entity and provides pass-through taxation, so the profits are taxes as the members’ personal income. A significant downside of the LLC structure is that many investors will not invest in an LLC because there is less accountability and control (from an investor’s perspective) with the way the company is run compared to the certainly that a more rigid structure like a corporation provides.
Ok, friends, if you are interested in social enterprise and want to know more, Call me! 614-572-6366. Email me! firstname.lastname@example.org.
Wick Law, LLC is a small business legal practice, representing owners, investors, and entrepreneurs in all aspects of commercial, corporate, and business law, estate planning, contracts and negotiations, business litigation, and real estate. For more information: Contact 614-572-6366, visit www.mwicklaw.com, or email us at email@example.com. Wick Law, LLC is located in Columbus, Ohio.
(Materials in this article have been prepared by Wick Law, LLC for general informational purposes only. This list is for educational purposes and is not to be considered exhaustive. More items could be added to this checklist based upon the type of transaction or industry standards. These materials do not, and are not intended to, constitute legal advice. The information provided is not privileged and does not create an attorney-client relationship with Wick Law, LLC or any of the firm’s lawyers. This checklist is not an offer to represent you. You should not act, or refrain from acting, based upon any information in this checklist. Wick Law, LLC maintains offices in Columbus, Ohio, and has lawyers licensed to practice in Ohio and in the United States District Court, Southern District of Ohio. The firm does not intend to practice law in any jurisdiction where the firm is not licensed.)
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