Social Enterprise Legal Status

Equity financing – As a quick note, traditional investors are more likely to invest in traditional businesses than in forms of social enterprise because there is less responsibility for mission-based objectives. In addition, equity investors who want to control the company`s operations can disrupt mission-based goals if they don`t share the same vision of the social enterprise`s mission. Benevolent owners – Private ownership of social enterprises generally falls under the heading of socially responsible enterprises. In developed countries, there are a growing number of small businesses that have been created to contribute to a social cause and generate income for their owners. In the United States, practitioners have founded their own industry organization: Social Venture Network. These businesses operate in accordance with standard small business laws. More information is also available on the Business for Social Responsibility website. Here are some steps to keep in mind when starting a social enterprise: April 28, 2022| 15.00-17.00 CEST Designing a legal framework for social enterprises – Learning seminar The not-for-profit company must comply with most regulations when carrying out income-generating activities. The defining characteristic of a nonprofit corporation is its tax-exempt status, which is governed by Section 501(c)(3) of the Federal Internal Revenue Code. This section of the Code requires the organization to carry on its activities primarily for charitable purposes and prohibits profits for the benefit of individuals or interest groups. In many countries, the law does not regulate or recognize social enterprise (a non-profit income-generating organization) as legitimate or legal.

As a result, non-profit organizations risk losing their non-profit status and associated privileges by starting a social enterprise or revenue-generating activity. Some countries have adopted special provisions in laws and tax laws for social enterprises. A social enterprise can be incorporated as a limited liability company (LLC) and customized with third-party certification. One of the biggest advantages of the LLC is its flexibility in the management structure. Founders can draft an operating agreement (i.e. an agreement between LLC members on how the company is run) to include accountability measures that are self-imposed and embedded in the company`s DNA. The LLC also offers limited liability protection and subsequent tax transfer of profits, where profits are taxed like members` personal income. There are good examples of documents for common legal forms. Ask yourself if you need something tailor-made. The following diagrams illustrate the structure of the social enterprise in relation to the parent organization. The authors compare and contrast different forms of profit-oriented structures. The three main forms they notice are C Corporation, S Corporation and Limited Liability Corporation (LLC).

All three protect their owners from personal legal liability. The difference lies in the way shareholders are taxed. In Corporation C, the profits of the corporation are taxed, and when the profits are distributed to the owners in the form of dividends, the dividends are taxed at the owner`s personal investment tax rate, which is lower than the ordinary income rate. An S company does not have corporate income tax on profits, but income and expenses go to the owners. Owners are therefore taxed only once at the personal income rate. An S company cannot have more than 100 shareholders and less than 25% of the income can come from passive activities such as shares. A third form, an LLC, allows anyone to be the owner, including another LLC or business. Succession planning – It is difficult to maintain a company`s social and environmental objectives after the company leaves or sells because these objectives are not part of the company`s DNA. There are other ways to maintain mission-oriented objectives by creating different classes of shares (e.g., super voting shares) and including special provisions in bylaws.

These methods can be complex and a lawyer should be consulted. The status tool on this page visualizes how social enterprise law has spread across the United States. Select a state or jurisdiction to get information about social enterprise forms available or under review by state legislators. All data collected and used on this website complies with the guidelines of the Sunlight Foundation`s Open Data Policy and can be downloaded for the corresponding categories by clicking on the link below the status tool map. The Benevolent Society and the Social Purpose Society are designed specifically for social enterprises. Both forms are taxed as C corporations and offer the same limited liability protection. One of the main differences with C Corporations is that these forms protect directors` business decisions more than C Corporations in pursuit of social and environmental objectives. Founders also have a greater ability to integrate their mission-based values and goals into the company, as these forms have built-in accountability enforcement mechanisms. Public shareholders – a consortium of not-for-profit stakeholders who own shares in a social enterprise (for-profit or not-for-profit). Often, shareholders are parent organizations, partners and donors who have an existing program or financial interest in the social enterprise. Similar legal issues concern other public entities under this ownership structure.