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What is a Social Enterprise Anyway?

It is probably no surprise that the term social enterprise can have different meanings depending on who you talk to. For example, if you follow the definition supported by the Social Enterprise Alliance, a social enterprise is a business that has the common good as its primary purpose. Social enterprises, however, are often categorized as dual-purpose businesses that attempt to balance the desire to make a profit with the desire to accomplish some sort of societal good. These differences aside, if a business or business idea is driven, at least in part, by a social mission, then the business likely falls somewhere along the social enterprise spectrum. Some of the legal forms available to a social enterprise are briefly discussed below. The best fit for any particular social enterprise, however, ultimately depends on the goals of the enterprise and other considerations such as tax liability and raising capital.

Nonprofits

Social enterprises are not new. Nonprofits, and more specifically public benefit nonprofits, are one of the purest forms of social enterprise. Public benefit nonprofits are formed to benefit the public and are generally prohibited from allowing any individual or other entity to privately profit from the functions of the nonprofit. Nonprofits are also subject to a variety of restrictions if the nonprofit wants to obtain tax-exempt status.

Fiscal Sponsorships

A fiscal sponsorship is a contractual arrangement between a taxable nonprofit social enterprise and a sponsoring tax-exempt nonprofit organization. Fiscal sponsorships are sometimes used during the start-up phase of an enterprise while it waits for tax exemption, or to give the social enterprise more flexibility to take on projects that may not otherwise be cost-effective. Under these arrangements, the social enterprise is often able to solicit tax-deductible grants and contributions and to utilize the sponsoring entity’s existing financial and administrative support services.

Hybrid Forms

Some entrepreneurs, however, want to make a profit while also advancing the common good. For these entrepreneurs the traditional corporate form may not be the best fit because it requires the board to make business decisions that are in the best interest of the corporation and the shareholders, which can often result in the board having to make decisions that put profit first. Similarly, the traditional nonprofit form or a fiscal sponsorship may also not be the best fit due to the limits on private benefit. But as the interest in social enterprises has increased, new legal forms, loosely referred to as hybrids, have been adopted to bridge this gap between the traditional nonprofit and traditional corporate forms. The benefit corporation and the social purpose corporation (formerly the flexible purpose corporation as of January 1, 2015) are two hybrid forms that have been adopted in California that allow a corporation to take noneconomic factors into consideration when making business decisions. [1]

Multi-Organizational Structures

Another option for operating a social enterprise is through a multi-organizational structure. Tax-exempt nonprofits, for example, are subject to strict standards by which the nonprofit can operate in order to maintain its tax-exempt status. If these limitations prohibit certain activities that would otherwise help the social enterprise accomplish its mission, then establishing a related for-profit entity, as a subsidiary or a joint venture, may give the social enterprise more flexibility to participate in those activities. Creating a multi-organizational structure, however, is not without its own set of considerations, so great care should be taken when designing these structures.

[1] Some states have adopted the low-profit limited liability corporation (L3C), but as of the date of this post, the L3C has not been adopted in California.

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