Legal structures for “blended value” social enterprises

One of the issues that plagues social enterprises focused on mixing socially beneficial goals with profitable business strategies is the lack of legal structures that recognize these sort of “hybrid” goals.  The prevailing legal paradigm forces social entrepreneurs to choose between mutually exclusive “for-profit” and “not-for-profit” forms even though neither choice adequately represents their business.   In addition to forcing social businesses into separate “for-profit” and ‘not-for-profit” silos, this tends to reinforces the notion that for-profits are all inherently selfish and that only non-profits may truly serve socially beneficial aims.

L3Cs, and to a lesser extent, B corporations were created to address the problems of “not-only-for-profit” social enterprises that are forced to exist in the nether region between traditional non-proft and for-profit forms.    The L3C, or Low Profit Limited Liability Corporation attempts to fill this legal void by creating a new form of entity for companies that are formed for socially beneficial purposes, but plan to return a small measure of profit to its owners.   So far, the L3C has been recognized in a few states like Vermont and Michigan.   In addition to the L3C, an organization named “B Lab” has created the quasi-legal “B corp” certification for social enterprises.  Although the B corp is not an actual legal entity, it is designed to recognize enterprises that have met certain criteria for social benefit.

Unfortunately these new structures do not really address either of the two main problems.  First, neither B Corps or L3Cs solve core the legal issue.   Although L3Cs ostensibly recognize mixed charitable/profitable goals, L3Cs do not provide any of the benefits traditionally associated with the non-profit form, such tax-exempt status or the ability to receive tax-deductible contributions.   Thus there is little, if any, legal advantage to choosing an L3C over the standard (and more flexible) LLC or corporate forms.  L3C proponents hope that the IRS will eventually allow investments in L3Cs to qualify as Program Related Investments (PRIs) (which would pave the way for L3Cs to receive funding from foundations) but that does not look to be on the horizon any time soon.  B corps, of course, are not legal entities at all and thus cannot do anything to change the existing legal duopoly.   Absent such legal recognition, B corps offer offer little more than of layer of “social branding” atop the existing profit/non-profit structure.

Unfortunately, neither the B corp nor the L3C does much to improve how the public views the legitimacy of a particular for-profit social enterprise.  The problem here is a general failure to appreciate the notion of “blended value” that manifests itself as a distrust of the objectives of any enterprise organized in a standard “for-profit” legal form.   For most, the idea of a socially-beneficial for-profit is a oxymoron akin to “military intelligence.”   The story of Kiva’s decision to incorporate as a non-profit instead of a for-profit (“The Profit in Non-Profit”) is instructive, as it highlights how much of the support that Kiva received from donors, board members, and companies like Microsoft, Intel, Starbucks, Facebook , LinkedIn that donated goods and services to the organization on the basis of its non-profit legal status that it would never have received were it organized as a for-profit.

The B corp in particular seems to be aimed at addressing these sort of “trust” issues.  From what I can tell, B lab is hoping that people will come to recognize B-corp certification as providing a sufficient stamp of “goodness” that a certified B corp would be trusted to the same degree as one might trust a non-profit.   In other words, the B corp brand would allow donors, grantors, board members and the general public to separate companies aimed a creating genuine social value from those who simply seek raw profit.  However, this is really a second-order problem — the opportunity to distinguish between “good” vs. “bad” for-profits does not arise until after the public has first accepted that idea that a socially focused for-profit is not an inherent contradiction in terms.  Once that leap has been made it is not clear that the B corp stamp helps donors  distinguish good vs. evil corporation more than they could on their own.

Although I question the value of the organizing as an L3C or getting certified as a B corp, the fact that these options are out there only helps increase the attention of lawmakers and the general public to the  emerging community of double/triple/quadruple bottom line enterprises, which can only be a good thing.  B Lab hopes one day that “B Corporations will be legally recognized by the states, tax preferred by the IRS, and valued by investors and consumers.”   Each of these goals are a long way off for the reasons I have described here, but it is good to know that they are at least they are focused on the right problems.

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3 Responses

  1. I’d like some more information/explanation regarding the statement above: “Thus there is little, if any, legal advantage to choosing an L3C over the standard (and more flexible) LLC or corporate forms.”

    How, specifically, is a standard LLC more flexible legally than an L3C?

    • From Wikipedia (because I am too lazy to look up the statutes):

      Whereas a traditional LLC may be organized and operated for any lawful business purpose, the L3C must be organized and operated at all times to satisfy the following requirements:

      1. The company must “significantly further the accomplishment of one or more charitable or educational purposes,” and would not have been formed but for its relationship to the accomplishment of such purpose(s);

      2. “No significant purpose of the company is the production of income or the appreciation of property” (though the company is permitted to earn a profit); and

      3. The company must not be organized “to accomplish any political or legislative purposes.”

      There are mirrorred from the IRS provisions regarding Program Related Investements (PRIs). Item #2 would disqualify quite a few business that are being built in the social space. Certainly many of the companies that have certified as B Corps would not satisfy this second requirement. Companies like Better World Books, or any of the numerous companies who sell environmentally sound products using traditional business models, renewable energy companies, fair trade products companies, etc. would probably not satisfy the “no significant purpose of the company is the production of income or the appreciation of property” requirement. So the L3C is not useful for companies that have a large social benefit but intend to earn a profit.

      But even if you perceive that your company would ostensibly have no problems satisfying each of these requirements you would still need to undertake non-trivial efforts to ensure you remain in compliance. Want to sent around a petitiion to supporters of your organization in support of pending legislation? Whoops, you just violated #3. Even without doing anything wrong you would need to set up policies, auditing procedures and reporting structures to ensure that your company remains in compliance with each of these. Non-profits have similar obligations, and this sort of hassle may be worth it if helps you to receive signifcant grant support in the form of PRIs. However I dont see how it would be worth it if you are not going to receive such support (and it is not yet apparent that the L3C will really allow you to do that).

      • You make some good points and I appreciate the clarification. However, I don’t at all agree with your statement: “So L3C is not useful for companies that have a large social benefit but intend to earn a profit.” An L3C is a for-profit enterprise that without intent to earn a profit will die on the vine.

        Also, there are “nonprofits” that earn profits while in pursuit of their charitable or educational purpose. I believe the term “nonprofit” is a misnomer and should one day go away. It’s more about charitable purpose than it is about profit.

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