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Find the Right Entity for Your Socially Conscious Organization

Find the Right Entity for Your Socially Conscious Organization


by


According to J. Gregory Dees, a leading expert in the area of social entrepreneurship, social entrepreneurs adopt a mission to create and sustain social value by drawing upon appropriate thinking in both the business and nonprofit worlds and by operating in a variety of organizations: large and small; new and old; religious and secular; nonprofit, for-profit and hybrid. Regardless of the organizational form chosen, social enterprises use earned revenues to pursue a triple bottom line positive impact on people, profits and planet.

Historically, enterprises with a social or charitable mission were operated as nonprofit entities in order to qualify for grants and contributions. Traditional for-profits are limited in the pursuit of a social or charitable mission by the legal duty of management to maximize shareholder or investor value, and typical for-profits are unable to obtain program-related investments from private foundations. Charitable deductions for C-corporations also cannot exceed 10 percent of the taxpayer’s taxable income, which further limits the entity’s charitable contributions.

According to the Nonprofit Almanac 2012, prepared by the National Center for Charitable Statistics and published by the Urban Institute Press, approximately 1.6 million nonprofits of the 2.3 million operating charities were registered with the IRS in 2010, an increase of 24 percent from 2000. These nonprofits compete for a limited pool of grants and charitable contributions. In order to remain sustainable, many nonprofits pursue collaboration or merger with other nonprofits to more effectively accomplish their missions such as workforce development, housing, community and economic development, education and health. Still others innovate revenue generation by selling goods, licensing intangible property or providing services. Revenue generation can also be enhanced through nonprofits’ ownership of equity in a for-profit through joint ventures or similar scenarios.

Hybrid organizations such as the low-profit limited liability company (L3C) and the benefit, flexible purpose or social purpose corporation are emerging through legislation in numerous states to reduce the limitations imposed upon traditional for-profits in pursuing social or charitable missions. Although such hybrid organizations have not been authorized in the Kansas or Missouri, hybrid entities can generally be formed in a state allowing such a hybrid entity and registered as a foreign entity in Kansas or Missouri.

Low-profit limited liability companies generally further one or more charitable purposes within the meaning of Section 170(c)(2)(B) of the Internal Revenue Code and are designed to receive program-related investments from foundations, government funding and traditional investment capital. L3Cs are for-profit entities that pay taxes on profits and cannot receive traditional grants or tax-deductible charitable contributions. The legislation authorizing L3Cs provides that no significant purpose is the production or appreciation of property; however, if the L3C, in pursuing its charitable purposes, creates significant income or appreciation it is not disqualified as a L3C.

Hybrid corporations such as the benefit corporations, flexible purpose corporations or social purpose corporations have shareholders and are not subject to the distribution restrictions imposed upon nonprofit corporations. A benefit corporation generally provides a general public benefit, considers nonfinancial interests of shareholders in making decisions, and issues public annual reports to measure public benefit. Flexible purpose corporations, only authorized in California, may pursue or attempt to accomplish charitable or public purposes or promote positive effects upon its employees, suppliers, customers, creditors, the community and society, and/or the environment. Social purpose corporations, adopted in Washington State and Texas, are similar to flexible purpose corporations in allowing the consideration of one or more social purposes.

Social entrepreneurs currently working within large organizations should not overlook opportunities to become social intrapreneurs within their organization by initiating new ideas that address social and environmental change in a profitable manner. One example of an intrapreneur is Win Sakdinan at Proctor & Gamble, who developed the company’s Future Friendly initiative. It helps consumers save energy, water and packaging with its brands. The TEDx Talk “Be the Change You Want to See in Your Company: Gib Bulloch at TEDxPlainpalais” discusses intrapreneurship in more detail.

Written by

Rebecca D. Martin is a shareholder with the law firm of McDowell, Rice, Smith & Buchanan, P.C., with practice emphasis in tax, business, and estate planning and administration. She has an LLM in Tax from UMKC, and has been certified in Social Entrepreneurship by the United States Association for Small Business and Entrepreneurship.

Categories: Triple Bottom Line

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