It used to be that there were essentially three choices: private, public, or nonprofit. Privately-held companies offer the most flexibility, without outside investors or the IRS constantly looking over your shoulders. A privately-held social enterprise can choose to invest some of its profits into achieving social impact without anyone second guessing those decisions. But if you’re ready to raise large amounts of capital, going “public” through an initial public offering is the usual way to go.
There’s a price for that, though. Publicly-held companies need to justify their actions to investors, who, as the legal owners, have the legal right to force management to do everything it can to increase profits, even at the expense of social impact. Public boards are obligated to sell the company if doing so would enhance “stockholder equity.” For that reason, Ben & Jerry’s went from being an independent company with a social purpose, to being part of an international conglomerate. Ben and Jerry didn’t have a choice in the matter, nor did their board.
That’s why many for-profit social enterprises tend to be privately held.
But the times they are a changing. A number of states have approved the Low-Profit Limited Liability (L3C) corporate structure, which attempts to bridge the gap between for-profit and nonprofit models. L3C’s must “significantly further the accomplishment of one or more charitable or educational purposes,” but can still have private investors and make a profit. See http://en.wikipedia.org/wiki/L3C
Another “hybrid” is a For-Benefit Corporation, or B-Corp. Based on an independent assessment, B-Corps receive a certification as socially responsible, and in so doing make it clear to investors that the company will consider other stakeholders, such as the community and the environment. See http://en.wikipedia.org/wiki/B_corporation,
So as you consider how to get “organized” with your social enterprise, be sure to consider these other structures as well as the usual suspects including LLC, partnership, S and C corporations, and nonprofit.
Get some expert advice, and then pick the structure that best fits your purpose. There’s no one correct answer, just the structure that’s best for your purpose and your market. Form Follows Function.
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Copyright © 2010 Rolfe Larson Associates – Fifteenth Anniversary, 1995 – 2010
Author of Venture Forth! Endorsed by the late Paul Newman of Newman’s Own
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Rolfe Larson provides consulting and training in areas such as strategic planning, market research, feasibility analysis, business planning, marketing and implementation strategies.