Five-minute general counsel: should I be a social enterprise?

Here’s a question on quasi-nonprofits that I’ve been hearing more often:

Do I need to have a nonprofit status to become a social entrepreneurial enterprise?

I found this LinkedIn question to be interesting for two reasons: first, it’s very related to a nonprofit question I field all the time, and second, I have a current client that is very socially conscious, both in terms of their personal focus as individuals and as a major goal for the company.

Here’s the answer and my advice:

What’s a social enterprise?

First, the “social enterprise” moniker is a red herring. There is no such thing as a unique type of company. (The L3C, the “low-profit limited liability company,” is a very distinctive special purpose entity, only available in a few states, that only really has a precise regulatory function. This almost certainly doesn’t apply UNLESS the major portion of your funding will come from large private foundations.)  I’ve read the heck of the L3C documentation, and it’s not the answer that people are looking for.

There are nonprofits and for-profits. For-profits can do whatever they choose with their profits or pre-operating profit cash flow, as determined by the board as elected by the shareholders. For example, does a for-profit company that donates software licenses qualify for your “definition?” Maybe, but so what? The best “proof” that what I’m saying is true comes from looking at one of the references in another (helpful but ultimately uninformed) answer to that same question:  the B-Corporation folks use traditional corporate governance to institutionalize broad social goals as explicit goals for a particular company. I think that’s dead-on.

What structure is the right one for these companies?

The real question is what your organization wants to do, and what corporate form is best suited for that purpose. Good corporate lawyers will never make the tail wag the dog: we find the right organizational and operational and contractual structure to help you accomplish what you want.

So please, do yourself a favor and start out with a vision, then find a lawyer to implement that vision.

I have clients that run the gamut of arrangements: for-profits, nonprofits, discounts for nonprofits, donations of services, cash donations, and side-by-side related for-profit and nonprofit entities. Every plan is different: what’s yours?

To get more information about this last point, read these posts on planning a nonprofit and forming a nonprofit; they describe the importance of starting with your vision, and then a plan, and only then turning to someone like me for actionable, firm recommendations that I stand behind.

2 Comments

  1. […] recently came across a LinkedIn question asking about entity selection for a social enterprise. The generic question for a generic business is what people often conceive of as an “easy […]

  2. […] time ago, I wrote a Five-minute General Counsel post on how to approach the question of whether a social enterprise fits a founder’s needs. In that post, I focused on the issue of whether the concept of fiduciary duties and the prudent […]

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