+ Social Enterprise Eric Davis Managing Partner Elliott & Davis, PC http://www.elliott-davis.com
+ So, What is a Social Enterprise? “A mission-driven entity which applies market-based strategies to achieve a financial, social and/or environmental purpose, thereby building a more just, sustainable world. Their aim- to build value that is social and/or environmental as well as financial- is often referred to as the triple bottom line. Many commercial businesses would consider themselves to have social objectives, but social enterprises are distinctive in that their social or environmental purpose remains central to their operation.” -Kyle Westaway www.socentlaw.com
+ Social Enterprises vs. Nonprofits & For Profits Two traditional types of basic entities: Nonprofit and For Profit. Social Enterprises such as Benefit Corporations, Flexible Purpose Corporations and LC3s, are a blend of the two. California, Hawaii, Maryland, New Jersey, Vermont, Virginia and New York have benefit corporation statutes. Benefit Corporations, Flexible Purpose Corporations or LC3s DO NOT exist in Pennsylvania. Might become an option in Pennsylvania in 2013.
+ Do something positive with your professional/working life. Customers consider socialWhy Should I Form and environmental impacta Social Enterprise? when making purchasing decisions. Novel enough to be really attractive to investors/capital.
+ Social Enterprises in Pennsylvania Seek B-Corp Certification (www.bcorporation.net) Voluntary Certification, NOT Legal Structure Can Be Applied to Any Legal Structure Differentiates Good Companies from Companies with Good Marketing/PR Periodic Assessment/Must Publish Results Need to Score Better than 80/200 on B-Labs Assessment Require addition of language to Bylaws/Operating Agreement No difference in Tax Treatment
+ What Entity is Right for Me? LLCs are best for Social Enterprises • Most flexible • Least amount of filings. • No required shareholders’ meeting. • Pass through taxation treatment
+ LLCs Formed for Social Enterprise: What’s Different? Needs: Management General/Special Public Benefit Manager(s)/Management committee “material positive impact on society and the must take benefit in account on all environment, taken as a whole, assessed against a third party standard, from the decisions business and operations of a benefit corporation” Annual Assessment by third party Third Party Standard Certificates of Membership Interests Developed by a party not related to entity it’s Should Include Specific Language measuring. Transparent in methodology. Reporting of Public Benefit Information Taxes Issue annual reports including records of No favored tax status. successes and failures for general and specific public benefit (within 120 days after fiscal year + (May change some day) must be publicly available) Formation Raising Capital Certificate of Organization No difference. Debt & Equity Financing is Must state specific public benefit (like non-profit) OK Operating Agreement Consider seeking Risk Capital from groups Including public benefit purpose, management looking to fund social benefit aspects duties and reporting of public benefit information. Certificates of Membership Should include specific language
+ Benefit Corporation: A New Class of Corporate Entity to Increase Transparency and Accountability. Needs: Formation General Public Benefit Articles of Incorporation “material positive impact on society and the Must state benefit corporation status and specific environment, taken as a whole, assessed public benefit. (Similar to nonprofit) against a third party standard, from the Bylaws business and operations of a benefit corporation” Must include public benefit purpose, management duties and reporting of public Third Party Standard benefit information Developed by a party not related to entity it’s Stock Certificates/Shareholders measuring. Transparent in methodology. Agreements Special Public Benefit Should include specific language Providing individuals/communities with beneficial products and services. Promoting economic opportunities for individuals Management or communities beyond job creation and making Directors must take benefit into account on all money. decisions. Promoting health or environmental preservation Annual assessment by third party Promoting arts and sciences. Some states require a benefit director (a good Reporting of Public Benefit Information idea in practice) Issue annual reports including records of successes and failures for general and specific Taxes public benefit (within 120 days after fiscal year + Subject to corporate tax on net income must be publicly available) Dividends are subjected to personal income tax No favored Tax Status (may change some day)
+ Flexible Purpose Corporation New Class of Corporation Allows Corporation to Pursue a Special Purpose Protects Directors from Shareholder Suit
+ LC3 New class of LLC Elevates charitable purpose over profit Allows a mix of philanthropic and private capital Designed Specifically to get Program Related Investment (PRI) Exception for organizations that have a charitable purpose. Gets around rules governing private foundations established by the Tax Reform Act of 1969. Very Expensive. (requires legal opinions and extra attachments to tax forms.) Used infrequently and usually only for large gifts.
+ExamplesBig Idea Cooperative, LLCThe Big Idea is a cooperatively owned and operated radical bookstore thatprovides literature that is multicultural, women-positive, queer-positive,class-conscious, anti-militaristic, and that promotes a sustainable world andcommunity. The Big Idea also serves the community by providing a safespace for all individuals to explore radical and alternative ideas.Sponsor Change, LLCSponsorChange.org provides non-profits with the means to recruit skilledcollege graduates to complete service projects and raise funds fromsponsors to reward their work with student loan payments, helping both non-profits and college graduates reach their full potential.