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Funding options deep dive social venture


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Funding Options Deep Dive at MassChallenge on September 11, 2012

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Funding options deep dive social venture

  1. 1. Funding Options for Social Ventures and Nonprofits Sharon C. Lincoln, Foley Hoag LLP Larry Nannis Katz, Nannis & Soloman CPA
  2. 2. 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  
  3. 3. 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.
  4. 4. 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)  
  5. 5. 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$es  •  No/Low  Fees  
  6. 6. Limited  Liability  Company  (LLC)  •  One  or  More  Owners  •  No  En$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  
  7. 7. 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  
  8. 8. Partnerships  •  Two  or  More  Owners  •  No  En$ty-­‐Level  Tax  •  Limited  Liability*  •  Except  General  Partners  •  Annual  Tax  and  En$ty  Filing  Requirements  •  Minimal  Formali$es  •  Moderate/Higher  Fees  •  Social  mission  may  be  highlighted,  emphasized  in   partnership  agreement  
  9. 9. Corpora$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  
  10. 10. 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)    
  11. 11. 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$ons  
  12. 12. Nonprofit/Tax-­‐Exempt  Organiza$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$ons  501(c)(4)   –  Business  leagues  501(c)(6)  
  13. 13. Summary  of  Funding  Op$ons  for  For-­‐Profit  En$$es  •  Investors   –  Stock  (founder,  restricted,  reverse  ves$ng,  op$ons)   –  Conver$ble  debt   –  Partnership  interest   –  Membership  interest  (LLC,  L3C)  •  Lenders  •  Grants  (less  common  for  tradi$onal  for-­‐profits)   –  Government  grants,  etc.  may  qualify  as  nonshareholder   contribu$on  to  capital  •  Revenue  from  opera$ons,  investments  •  Tax  breaks  (state,  local  exemp$ons,  tax  credits,  etc.)  
  14. 14. Summary  of  Funding  Op$ons  for  Tax-­‐Exempt  En$$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)  
  15. 15. We’re  here  to  help   Sharon  C.  Lincoln   Larry  Nannis   Foley  Hoag  LLP   Katz,  Nannis  &  Solomon,  PC   617-­‐832-­‐1287   781-­‐453-­‐8700