So, You Want To Be a Social Entrepreneur?: The A, B, and (Flex) Cs of Hybrid Organizational Forms

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By Basha Rubin
| Business Formation

It is no secret that building a strong reputation is critical to a business’s success, and "social entrepreneurship" is trendy. A number of companies, following in the footsteps of Toms, have built brands and brand loyalty by linking the sale of their products with a social cause. Studies demonstrate that consumers, in particular millennials (those 12 to 33 years old), are increasingly making purchases based on a company’s support of a social mission.

Although critics argue the concept of “doing good to do well” is simply a corporate public relations mantra, some prominent business thinkers see it as a necessity for long-term viability and a way to reshape our broken capitalist system.The emphasis on creating “shared-value” advocates the breakdown of the barrier between organizations dedicated to profit and those dedicated to social impact.

Blurring the line between pure profit maximization and pure social mission, however, is not without its legal ramifications. As both historic and recent lawsuits demonstrate, corporate leaders can find themselves facing lawsuits from shareholders for failing to maximize profits. The possibility of multi-million dollar lawsuits or hostile takeovers is enough to scare even the most dedicated social entrepreneur.

State legislatures have responded by expanding the organizational options by implementing legislation that creates various “hybrids.” These hybrids are variations on the traditional corporate and business forms designed to provide greater organizational flexibility.

social-organization-structure

If you are an aspiring social entrepreneur with a new business idea or an existing charity that needs a for-profit subsidiary, below are the hybrid forms that may be right for you:

Public Benefit Corporation (B Corp)

The B Corp is a modification of the traditional corporate form, and the most widely adopted hybrid model—24 states have such laws on the books with over 10 more considering it. Although not dramatically different than traditional corporations, B Corps have three notable variations in purpose, liability, and transparency. Unlike traditional corporate forms, a B Corp requires consideration of environment, community, and employees and suppliers in its corporate purpose and its decision-making. This societal purpose shields B Corps from liability for failing to maximize value for shareholders. B Corps, however, are subject to greater transparency requirements than traditional corporations. B Corps must publish a detailed Public Benefit Report for public review and inspection, and failure to achieve a public benefit can results in enforcement proceedings reviewed under a third-party standard. 

Flexible Purpose Corporation (Flex C Corp)

Whereas the B Corp requires a general public benefit, the Flex C enables a company to specify a “special purpose” in its articles of incorporation. Companies have significant leeway in determining the specific purpose ranging from charitable or public purpose to minimizing the effect of the company’s activities. The chosen special purpose becomes a priority of the company and it is required to release reports detailing their adherence to the purpose. In addition, under Flex C, the company has the “flexibility” to create the various mechanisms by which dedication to its specific purpose will be reviewed.

Low-Profit Limited Liability Company (L3C)

The L3C combines nonprofit and for-profit organizational forms. Unlike a traditional LLC, the L3C is primarily dedicated to a charitable or educational purpose and only secondarily dedicated to generating some profit. In contrast to non-profits, the L3C is free to distribute the profits to its members/owners. A significant advantage of this form is to ensure that your company is eligible to receive program-related investments (PRI’s) from foundations and donor-directed funds.

Whether you have already selected a business form or are lost in the expanding sea of options, it is imperative to enlist a lawyer to organize your business. By explaining your business plan, anticipated sources of capital, and goals, a Priori lawyer can determine what form is right for you—whether it is a traditional corporation, nonprofit, or a hybrid.

Looking to start a business, find a lawyer!

 

Special Thanks to Vincent DiForte for his research and editorial contributions to this article.

Photo Credit: International Information Program (IIP) via Compfight cc

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