ENTR4800 Class 6 (Part 2): Legal Considerations for Social Enterprise


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Theory: Why is legal form such an important issue for social enterprise?

What legal forms can social enterprises assume, and what are the pros and cons for each form?


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ENTR4800 Class 6 (Part 2): Legal Considerations for Social Enterprise

  1. 1. ENTR 4800: Social Entrepreneurship Class 6 (Part 2): Legal Considerations Monday, October 25, 2010 1 Instructors: Norm Tasevski (norm@socialentrepreneurship.ca) Karim Harji (karim@socialentrepreneurship.ca)
  2. 2. © Norm Tasevski & Karim Harji Agenda •  After the break… •  Legal forms applicable to social enterprise •  Who sets the rules? •  Legal Innovations •  What did we learn – today? •  Next week 2
  3. 3. © Norm Tasevski & Karim Harji A Caveat… There is no defined (national or provincial) legal form for social enterprise in Canada 3
  4. 4. © Norm Tasevski & Karim Harji A Second Caveat… Form follows function 4
  5. 5. © Norm Tasevski & Karim Harji 5
  6. 6. Legal Forms Applicable to Social Enterprise… 6
  7. 7. For-Profit Corporation! 7 Non-Profit Corporation! Charity!Partnership! Sole Proprietorship! Co-Operative Corporation!
  8. 8. © Norm Tasevski & Karim Harji For-Profit Corporation! •  Incorporated under the Business Corporations Act (Ontario) (the “OBCA”) or the Canada Business Corporations Act (federal) (the “CBCA”)! •  With share capital! 8 •  Most flex in terms of profit-making activities! •  Can access all forms of investment (debt, equity, etc)! •  Provides clarity of purpose (i.e. the financial bottom line)! •  Limited personal liability! •  Pay corporate tax! •  Cannot access grants! •  Cultural/ psychological barriers with operating a “for- profit social business”!
  9. 9. © Norm Tasevski & Karim Harji Charity! •  Incorporated via Letters Patent under the Corporations Act (Ontario) or Canada Corporations Act (federal)! •  Without share capital! 9 •  Don’t pay corporate tax on earnings! •  Can issue tax receipts! •  Can access many government/ foundation/ corporate grants! •  Least flex in terms of profit-making activities! •  Limited in the types of investments you can access (e.g. equity)! •  Time-consuming!! •  Psychological barriers with operating a “social business”! •  An aversion to “risk taking”! •  Can lose status if “too successful”!
  10. 10. © Norm Tasevski & Karim Harji Sole Proprietorship! •  Registered via Business Names Act (Ontario) or Canada Corporations Act (federal)! •  Without share capital! 10 •  The simplest (and quickest) legal form! •  You have full control of business decisions! •  Flexibility to make business decisions quickly! •  No separate filing for income tax! •  Unlimited liability!!! •  The business is the entrepreneur! •  Hard to find investors! •  Limited creative input (i.e. you’re the only one with ideas!)! •  Less “professional” than other forms!
  11. 11. © Norm Tasevski & Karim Harji Non-Profit Corporation! •  Incorporated via Letters Patent under Corporations Act (Ontario) or Canada Corporations Act (Federal)! •  Generally without share capital! 11 •  Can access grants! •  Can access debt financing! •  Tax exempt as long as organized and operated for defined social/community benefit! •  Some NPs are more open to (limited) risk-taking! •  Can’t issue tax receipts! •  Limited in the types of investments you can access (e.g. equity)! •  Psychological barriers with operating a “social business” ! •  Can lose status if “too successful”!
  12. 12. © Norm Tasevski & Karim Harji Partnership! •  Registered under the Partnerships Act (Ontario)! •  With or without share capital! •  Usually organized using a Partnership Agreement! 12 •  Similar benefits to sole proprietorship! •  Combines skills/ competencies of two people! •  Can sign contracts and borrow money in its own right! •  For most partnerships, unlimited liability! (at least in Canada…)! •  Acrimony between partners is common! •  Difficult to find investors!
  13. 13. © Norm Tasevski & Karim Harji Co-Operative Corporation! •  Incorporated under the Co-Operative Corporations Act (Ontario) or Canada Cooperatives Act (Federal)! •  Wither with or without share capital! 13 •  Well-established structures! •  Integrates the concept of “community benefit” already! •  Cannot issue tax receipts! •  Generally not exempt from paying tax! •  Psychological barriers with operating a “social business”! •  Difficulty making decisions (too many people at the table)!
  14. 14. © Norm Tasevski & Karim Harji Exercise: Which legal form makes sense for…! 14
  15. 15. © Norm Tasevski & Karim Harji Exercise: Which legal form makes sense for…! 15 Your venture???!
  16. 16. Who sets the rules?… 16
  17. 17. © Norm Tasevski & Karim Harji 17 Specifically…  
  18. 18. © Norm Tasevski & Karim Harji CRA Guidelines •  Direction (law, regulations, guidelines, precedents) around social enterprise are not completely clear •  Community economic development (CED)-specific exemptions: –  Relief of unemployment: training business. –  Relief of poverty through operating stores: business that provides low-cost necessities. –  Relief of people with disabilities: “social business.” –  Relieving suffering in economically challenged communities •  Federal view of the business activity may differ from any provincial position 18
  19. 19. © Norm Tasevski & Karim Harji 19
  20. 20. © Norm Tasevski & Karim Harji An Evolving Conversation… 20
  21. 21. © Norm Tasevski & Karim Harji Hybrid Structures 21
  22. 22. © Norm Tasevski & Karim Harji Talk to a Lawyer! 22
  23. 23. Legal Innovations… 23
  24. 24. © Norm Tasevski & Karim Harji Legal Innovation: CIC (UK) •  Established to trade (goods or services) for the community good •  Requires “community interest statement” application to the CIC Regulator. Publically-available annual reports required to confirm (adherence to) community interest requirement •  May issue shares in order to raise capital •  Cap on returns (dividends paid) set by the Regulator •  Subject to an “asset lock” –  Assets and profits must be permanently retained by the CICs for community benefit, or transferred to another CIC subject to an asset lock, or to a charity •  Taxed in the same manner as other businesses 24
  25. 25. © Norm Tasevski & Karim Harji Legal Innovation: L3C (US) •  Variation on American Limited Liability Companies (LLCs) •  LLC investors are members rather than shareholders •  Terms of the operating agreement guarantee the public benefit nature of the entity’s work •  Like LLCs, L3Cs are not subject to federal income tax themselves, but the income they pay to members is taxable according to the rates applicable to each member •  Able to attract private capital through the sale of shares and other securities, various forms of loans, or other commercial financial arrangements. •  Ability to receive Program Related Investments from foundations •  No asset lock and no dividend cap 25
  26. 26. © Norm Tasevski & Karim Harji Legal Innovation: B Corp (US) •  To be certified as a B corporation under the B Lab system, the corporation must: –  Achieve a minimum score of 80 (out of 200) on the B Ratings System, a tool to assess a company's social and environmental performance. –  Agree to make legal changes to its articles of incorporation to expand the responsibilities of the company to include consideration of stakeholder interests. –  Pay B Lab an annual licensing fee. –  Recertification is required every two years. 26
  27. 27. © Norm Tasevski & Karim Harji 27
  28. 28. © Norm Tasevski & Karim Harji Summary: Key Questions •  Is the venture’s primary mission mostly social or profit? •  What are the founders’ views, skills, motives, and intentions? How closely held is the organization? •  What is the market for the primary activities (goods/ services)? •  How much money is needed and where will you get it? •  What level of risk and liability is your organization willing to take? •  What will be the relationship between the enterprise and the parent organization? Will the enterprise be a separate entity? What is the governance structure of the enterprise (separately and in relation to the parent organization)? 28
  29. 29. © Norm Tasevski & Karim Harji What did we learn? 29
  30. 30. © Norm Tasevski & Karim Harji For your projects… Clearly identify the following: –  Your legal form and why you chose it –  How it aligns with your proposed revenue stream(s) and investment sources –  How it aligns with your plans for growth –  How it balances the financial and social considerations and motivations for your venture 30
  31. 31. © Norm Tasevski & Karim Harji Next Week •  Guest speakers: –  Serge Levert-Chaisson - Sarona Asset Management –  Adam Spence - Social Venture Exchange (SVX) •  Deliverable: Assessment of Business Potential •  Readings: Impact Investing and Social Capital Markets 31
  32. 32. © Norm Tasevski & Karim Harji References •  “The Canadian Social Enterprise Guide, 2nd Edition”, Chapter 7 (The Legal Context), by the Enterprising Nonprofits Program •  “Legislative Innovations and Social Enterprise: Structural Lessons for Canada” by Richard Bridge and Stacey Corriveau •  “The Fine Print: Vital Information for Canadian Charities Operating Social Enterprises” by Stacey Corriveau •  “Canadian Registered Charities: Business Activities and Social Enterprise – Thinking Outside the Box” by Terrance Carter and Theresa Man •  “Social Enterprise: Choosing a Legal Form for your Social Enterprise,” by the Business Link Business Service Centre and Western Economic Diversification Canada •  “Legislative Innovations” by William Chung, Mark Convery, Kerri Golden and Allyson Hewitt, MaRS Discovery District 32