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Social Enterprise: Choice of Legal Entity

Entity Choice for Social Enterprise from The Startup Garage

As of yet, a social enterprise is not its own legal structure, and a social enterprise company must consider its legal structure options and select the one most congruent with the company’s plan.  Below we explain the options available:

Non-Profit:  A non-profit is the most common legal entity chosen by social enterprises.  However, a non-profit that has attained 501(c)(3) or 501(c)(4) status with the IRS faces a lot of limitations as to how profits can be re-invested into the company and how they can raise investment capital by offering outside investors ROI.  Therefore, a non-profit is not the ideal structure for a social enterprise that seeks to re-invest profits and pay competitive salaries to its employees.

L3C (Low Profit Limited Liability Company): Although legislation has not yet been adopted in California for an L3C, this entity, which is considered a for profit with a socially beneficial mission, is available in nine states and pending in ten more.  The purpose of the L3C is to simplify use of program related investments (PRIs) from private foundations.  Foundations must direct 5% of their assets to a charitable purpose, and an L3C can be a recipient of an investment that satisfies the criteria of this requirement by the IRS.  Read more about L3Cs here.

Benefit Corporation:  A benefit corporation is an entity type in California (and seven other states) that is required to have a public benefit purpose for its Articles of Incorporation and that requirement is audited by a third-party standard.  The most well-known third-party standard developer is B-Lab, which certifies complying companies as “Certified B Corporations”.  Different states have different requirements for incorporation as a benefit corporation, and B-Lab has provided a guide to navigating those requirements.

Flexible Purpose Corporation:  Unique to California, a flexible purpose corporation is another entity type that is allowed to pursue certain special purposes and relies on shareholders to oversee the fulfillment of the special purposes through minimum voting requirements and required disclosures.  The California Corporations Code sections that sets forth the requirements for this entity are available here.

It is also possible to choose an LLC or a corporation as an entity form for a social enterprise, and companies in some states may be required to for a lack of options otherwise.  Both an LLC and a corporation offer personal liability protection for the owners but differ in their tax benefits and corporate formalities.  To determine the best entity choice for your company, you would be well advised to consult an attorney.

There’s no perfect business structure for success in a social enterprise: the model that will ultimately serve you best  depends on the good or service being delivered, the market being served, the ability to obtain funds for growth, and the political, social, and cultural context of the regions in which the social entrepreneur operates.


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