One aspect of entrepreneurship that founders usually make a
mistake at or don’t give enough forethought is choosing a legal structure for
their venture. This issue is further complicated for founders of social
ventures as they want to have a legal option that has the tax benefits of a
non-profit and the capital raising advantages of a for-profit organization. One
of the best alternatives for a social entrepreneur is one that allows both:
private ownership and investment as well as program related investments and
charitable contributions. The following paragraph highlights the best legal
structures for social ventures and their salient features:
L3C
L3C
·
Taxation flows through to the members of the
L3C, unless the L3C elects to be taxed as a corporation
·
Designed to attract program related investments
made by private foundations and other private investors
Benefit Corporation
·
Taxed on all income depending upon how the
corporation is classified: S- or C- Corp
·
May receive program related investments from
private foundations
Cooperative
·
Exempt from taxation on all income that is
distributed to worker-members
·
Owned and controlled by groups of individuals or
businesses united to promote their common economic and social needs
·
Making profits/surplus is desirable, but not a
primary goal
Another alternative for organizations is to get a B-Corp
certification. B Corp certification (also known as B Lab certification or B
Corporation certification) is a private certification issued to for-profit
companies by B Lab, a global non-profit organization with offices in the United
States, Europe, South America, Canada, Australia, and New Zealand. To be
granted and to preserve certification, companies must receive a minimum score
on an online assessment for "social and environmental performance",
satisfy the requirement that the company integrate B Lab commitments to
stakeholders into company governing documents, and pay an annual fee ranging
from $500 to $50,000. B-Corps envision a global economy that uses business as a
force for good, a business which is purpose driven and creates benefits for all
stakeholders, not just shareholders.
The B-Lab certification is a third party standard requiring
companies to meet social sustainability and environmental performance
standards, meet accountability standards, and to be transparent to the public
according to the score they receive on the assessment. B-Lab certification
applies to the whole company across all product lines and issue areas.
For-profits of all legal business structures are eligible for certification.
Advantages
- Similar to other business associations, certified B Corporations and their employees have access to a number of discounts from outside entities and fellow members
- Academic contributions of loan forgiveness
Disadvantages
- B-Lab certification has no legal status
Distinction from
Benefit Corporation
- Benefit Corporation is a legal status conferred by State law in the US; B Lab certification is issued by a private organization and has no legislative framework
- B Lab certification is not needed to obtain Benefit corporation status
- Legislation for the passage of this corporate legal status has been passed in 30 states, including Delaware, whereas B Lab Certification is privately issued by an organization run by people principally issued from the business community
Attending a seminar on legal status for social ventures got
me thinking about what are the available legal options for social
entrepreneurs? Which option is the best for a given set of circumstances? Which
option do you think is the best for your venture and why?
Sources:
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