Funding Options for Social Ventures and Nonprofits Sharon C. Lincoln, Foley Hoag LLP Larry Nannis Katz, Nannis & Soloman CPA
Ini$al Thoughts “I’m encouraging young people to become social business entrepreneurs and contribute to the world, rather than just making money. Making money is no fun. Contribu$ng to and changing the world is a lot more fun.” -‐Muhammad Yunus, co-‐founding board member, Grameen America
General Overview: For-‐proﬁt vs. Nonproﬁt For-Profit Nonprofit / Tax-ExemptMission Profit motive Religious, charitable, scientific, Social benefit (L3C, benefit testing for public safety, literary, or corporation, etc.) educational purposes Private enrichment Public good must be promoted from earnings, activitiesFunding Equity investments Donations and grants Loans (charitable deduction for donations to 501(c)(3) organizations) Grants (in select cases) Earned income Loans Earned incomeOwnership Individuals and entities None Note: AG and IRSTaxes Pay income tax and capital gains Exempt from income tax and tax capital gains tax (but still must file an information return) Note: UBIT, employment tax, etc.
In detail: The For-‐Proﬁt World • Sole Proprietorship • LLC/L3C – Single-‐Member – Mul$-‐Member • Partnership – General Partnership – Limited Partnership – Limited Liability Partnership • Corpora$on – S Corpora$on – C Corpora$on – Beneﬁt Corpora>on – Flexible Purpose Corpora>on (California)
Sole Proprietorship • Single Owner • No En$ty-‐Level Tax • No Liability Protec$on • No Filing Requirements – Except: • “Doing Business As” • Employees • Taxable Sales • No Formali$es • No/Low Fees
Limited Liability Company (LLC) • One or More Owners • No En$ty-‐Level Tax • Limited Liability • Annual Tax and En$ty Filing Requirements • Flexible Formali$es • Higher Fees • Social mission may be highlighted or emphasized in LLC agreement
Low-‐Proﬁt Limited Liability Companies (L3C) • One or More Owners • No En$ty-‐Level Tax • Limited Liability • Annual Tax and En$ty Filing Requirements • Flexible Formali$es • Higher Fees • Charitable or educa>onal mission must be primary, proﬁt-‐making secondary • L3C legisla$on in Illinois, Louisiana, Maine, Michigan, North Carolina, Rhode Island, Utah, Vermont, and Wyoming
Partnerships • Two or More Owners • No En$ty-‐Level Tax • Limited Liability* • Except General Partners • Annual Tax and En$ty Filing Requirements • Minimal Formali$es • Moderate/Higher Fees • Social mission may be highlighted, emphasized in partnership agreement
Corpora$ons • One or More Owners • Tax Treatment Depends on “S” or “C” Status • Limited Liability • Annual Tax and En$ty Filing Requirements • Rigid Formali$es • Moderate Fees • Tradi>onal corpora>ons have one primary ﬁduciary duty: Enrich shareholders • Flexible purpose corpora>ons may have mul>ple ﬁduciary du>es such as social and environmental priori>es, in addi>on to shareholder enrichment; beneﬁt corpora>ons must have a general or speciﬁc social duty
Beneﬁt Corpora$ons • Massachuses just enacted legisla$on permi]ng beneﬁt corpora$ons to be organized in the Commonwealth • Mass. General Laws Chapter 156E • Must pursue social welfare objec$ves; included in ar$cles of incorpora$on • Permit corporate directors to take into considera$on and pursue general or speciﬁc social welfare goals, in addi$on to maximizing proﬁt – No director liability for not maximizing shareholder return on account of pursuing these objec$ves • More transparency requirements – Annual beneﬁt report – Oversight and repor$ng by designated beneﬁt director (and possibly also, beneﬁt oﬃcer)
S Corpora$ons Eligibility – Domes$c Corpora$on – ≤ 100 Shareholders • All shareholders must be individuals • No shareholder may be a non-‐resident alien – One Class of Stock – In Massachuses, Ch. 156E appears to permit beneﬁt corpora$ons to be S Corpora$ons
Nonproﬁt/Tax-‐Exempt Organiza$ons • Nonproﬁt is a state designa$on • Tax-‐exempt status is a federal designa$on, regulated by the IRS – Nonproﬁt en$$es organized at the state level apply to the IRS to be recognized as tax-‐exempt • Chari$es, schools, hospitals are generally 501(c)(3) en$$es – Social welfare organiza$ons 501(c)(4) – Business leagues 501(c)(6)
Summary of Funding Op$ons for For-‐Proﬁt En$$es • Investors – Stock (founder, restricted, reverse ves$ng, op$ons) – Conver$ble debt – Partnership interest – Membership interest (LLC, L3C) • Lenders • Grants (less common for tradi$onal for-‐proﬁts) – Government grants, etc. may qualify as nonshareholder contribu$on to capital • Revenue from opera$ons, investments • Tax breaks (state, local exemp$ons, tax credits, etc.)
Summary of Funding Op$ons for Tax-‐Exempt En$$es • Contribu$ons, gifs, membership dues – 501(c)(3) en$$es may receive tax-‐deduc$ble contribu$ons – Public chari$es must meet certain thresholds of public support in order to avoid classiﬁca$on as private founda$ons • Grants • Revenue from tax-‐exempt opera$ons, investments – revenue from ac$vi$es unrelated to tax-‐exempt opera$ons is taxable…too much of this type of unrelated revenue can jeopardize tax-‐exempt status) • Tax subsidy (not liable for income tax)
We’re here to help Sharon C. Lincoln Larry Nannis Foley Hoag LLP Katz, Nannis & Solomon, PC 617-‐832-‐1287 781-‐453-‐8700 firstname.lastname@example.org email@example.com
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