Saving the World – One Social Venture at a Time

-Written by TCN Guest Contributor, Sharon C. Lincoln, Esq. Foley Hoag LLP

So you’d like to make the world a better place and have an idea that will do that? That’s great! These days, a social innovator like you has more options than folks who wanted to save the world twenty years ago. Or even five years ago. It’s a good time to try to save the world.

Here’s a summary of some options:

Pure Charity

Nothing new here – if you want to establish a charity, the process is straightforward. First, incorporate as a nonprofit organization at the state level then apply for tax-exempt status from the IRS. However, there are a few items worth considering in advance, to make sure this is the right vehicle for your brilliant new idea:

1. Mission: A charity is a mission-driven organization. It is not driven by a mandate to maximize profits. A charity is a very good vehicle for safeguarding the social good you intend to accomplish.
2. Funding: If you are certain that you will be able to raise sufficient funds through gifts, grants, and donations from a wide variety of individuals and organizations, this may be perfect for you. Note that charities cannot issue stock, convertible debt or other ownership interests, so raising capital from investors is not an option. No one owns a charity. Not even the folks who got it started in the first place.
3. Regulations: Since charities receive a sizeable subsidy from the federal government in the form of an exemption from income taxes, the IRS – through the Internal Revenue Code – regulates the charitable sector. Be prepared for technical, complex, and less-than-intuitive rules, as well as for federal and state information returns.
4. Compensation: Running a charity can be fulfilling, rewarding, and fun. Doing good really can be its own reward. Don’t expect to get rich doing things this way, though. The IRS has rules prohibiting lavish salaries. In addition, you won’t be able to “cash out” after the charity takes off and is a success – remember, no one owns a charity.

The New Hybrids

Benefit Corporations

If you want the flexibility of a for-profit combined with a commitment to doing good hardwired into your new organization, a benefit corporation may be the vehicle for you. Many states, including Massachusetts, have laws that permit the formation of benefit corporations. (California even has a similar type of entity called a “flexible purpose corporation”.)

Like a traditional corporation, benefit corporations are for-profit entities that can raise money through issuing stock, debt, warrants, etc. They can decide to pay their executives market rate salaries. As the founder of a benefit corporation, you would likely have the option to cash out if the venture is a success.

Like a charity, a benefit corporation must commit to promoting a general social benefit and may be run in a manner that prioritizes this social benefit over maximizing profits. In fact, benefit corporations generally must be run in a manner that takes multiple interests into consideration – including customers, employees, the local, regional and global community, and the environment.

This is in stark contrast to traditional corporations which have one main focus: maximizing shareholder value. It was this duty to bring in the most money for shareholders that prompted the founders of Ben & Jerry’s to agree to sell their company to Unilever. Even though many questioned whether Unilever would continue the company’s innovative social and environmental initiatives, Unilever offered the highest price so the directors of Ben & Jerry’s felt duty-bound to accept the offer.

If you want to establish a flow-through social venture (akin to a partnership), S-corporations can be benefit corporations as well.

Established corporations that have opted to convert to benefit corporation status include Patagonia and King Arthur Flour.

L3Cs

The limited liability company (LLC) counterpart to a benefit corporation is a low-profit limited liability company (L3C) which must specify a social benefit in its organizing documents. In addition, an L3C may not prioritize making a profit over its social mission. An L3C is also a flow-through entity.

B Corporations

If your investors are wary about putting money into a new type of entity or you yourself would prefer to stay with something tried and true, you can always establish a traditional corporation, LLC or partnership and have it certified as a responsible social venture by a neutral third party. For example, B Lab confers a “B Corp” certification on entities that commit to adhering to certain social benefit criteria. This certification must be renewed every two years. While a certification such as the “B Corp” label is akin to a Good Housekeeping seal of approval, and does not carry the legal significance of a benefit corporation or L3C, it can be a useful identifier that sets your social venture apart from the pack.

Established companies that have opted for B Corp certification include Dansko and Seventh Generation.

Final Thoughts

A traditional charity may still be the way you want to go, since a downside to these new types of entities is that they are new. That means you will have to educate your investors and your customers about what makes your social venture worth investing in and worth buying from. But if you really want to establish a profit-making venture with the soul of a nonprofit, one of these new hybrid forms may be just right for you.