Effective Social Enterprise

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Effective Social Enterprise: A Menu of Legal Structures

The new client, comfortably seated at the conference room table, asks: ‘‘What is the definitive legal form for a new social enterprise — a nonprofit corporation that is tax exempt as an organization described in IRC section 501(c)(3);1 a nonprofit corporation that is tax exempt as an organization described in section 501(c)(4); a nonprofit corporation that is not tax exempt; a for-profit corporation; a for-profit S corporation; a B corporation; a limited liability company; a low-profit limited liability company, also known as an L3C; a combination of the above; or other?’’ The seasoned attorney, not the least bit intimidated by this complex question, replies with the often used, lawyerly, and in this case quite accurate, response, ‘‘It depends.’’

In December 2006 I wrote an article titled, ‘‘Social Enterprise: A Legal Framework’’ (The Exempt Organization Tax Review, December 2006, p. 233). That article was an overview of the legal issues facing the social enterprise movement in the United States. In the two-plus years since writing that article, I have had an opportunity to advise more and more social entrepreneurs, some who wish to form a new tax-exempt entity, others who lead established exempt organizations and are seeking to expand their revenue-generating activities, and some who have business plans in various stages of development and are not sure whether they should form a for-profit entity, a nonprofit entity, or both.

Those seeking to use both a for-profit and a nonprofit sometimes refer to the new entities as a hybrid social enterprise. Those of us who work with social enterprises recognize by now that there is no legal definition of social enterprise, and there is not even a uniformly recognized nonlegal definition, although there have been many valiant attempts. The Social Enterprise Alliance (http:// www.se-alliance.org) defines a social enterprise as ‘‘an organization or venture that achieves its primary social or environmental mission using business methods.’’ The Skoll Foundation (http://www.skollfoundation.org) defines social entrepreneur, one who forms and leads a social enterprise, as ‘‘society’s change agent: a pioneer of innovations that benefit humanity.’’

To me, the word ‘‘enterprise’’ implies that there is a businesslike activity. More often than not a businesslike activity will seek to generate revenue. The word ‘‘social’’ implies that some good is coming from the enterprise, other than merely the generation of profits. What makes a particular endeavor socially beneficial is, of course, somewhat subjective. At its core, a social enterprise, whatever else it is or is not, is a businesslike activity that is designed, at least in part, to do good, and not simply to generate profits.

Beyond this basic concept, I am not concerned here with definitions, nor do I care to debate, as exempt organization lawyers sometimes do, whether the concept of social enterprise is good, truly differs from traditional philanthropy, or is just a logical extension of traditional philanthropy. It may well be all of the above. Personally, I believe that identifying socially motivated revenuegenerating activity as social enterprise is more helpful than not, that social enterprise does differ, at least in some important ways, from traditional philanthropy, but that social enterprise is not an entirely new construct. It has evolved from at least two sources: (1) the traditional revenue-generating nonprofit models, including hospitals, schools, and low-income housing organizations; and (2) the significant increase in for-profit venture activity during the past 20 or more years.