The social enterprise is a misfit in the realm of legal structures, camped out in the middle ground hedged between for-profit and non-profit. Its founder, the social entrepreneur, is a unique character, too mission focussed to set up shop with the corporate boys, while too profit-focussed to dream with the NGOs.
The shades of grey are, however, becoming more defined. New legal structures in the US and UK, as well as Finland, Norway and France to name a few, are making room for the new kid on the block, legalising an entirely new way of doing business and philanthropy by combining what has for long been perceived as two very different and separate practices.
Legal structures define the way people do business and philanthropy by providing the framework within which to operate. These structures determine the rules of engagement; how an enterprise can form, operate, and interact with other enterprises. Different legal structures cater to different types of organisations, with each offering a variety of pro’s and con’s to the entrepreneur.
The social entrepreneur, the most recent addition to the entrepreneurial family, is unconventional in his practices, combining two stereotypically separate arenas into one powerful cocktail of positive social and environmental impact and profit. Nexii advisory board member and founding partner of Total Impact Advisors, Arthur Wood, recounted a saying pertinent to the very importance of the social enterprise, “Why in society should it be acceptable to make money out of sex drugs and rock ‘n roll but not making money out of solving the fundamental issues of our time”.
Despite the wide variety of legal structures available in the US and UK, social entrepreneurs don’t quite fit into the conventional business or charity models on offer. To better enable such box-breaking entrepreneurs, numerous legal structures have been developed and are currently either in the legislative pipeline or legally available in the US and UK.
These emerging structures are largely evolutions of existing frameworks. For example, the Benefit Corporation (BCorp) available in the US is an evolution of the Community Interest Company (CIC) used in the UK, while the Low Profit Limited Liability Company (L3C) structure is an adaption of the Limited Liability Corporation (LLC). These structures can be distinguished by purpose into two groups: company structures such as the CIC in the UK and BCorp in the US, or partnership structures, including the L3C model in the US and the Social Enterprise Limited Liability Partnership (SE LLP) in the UK. Despite the evolution in structures, its not an “out with the old and in with the new” situation according to Arthur Wood, “We need all of the legal structures quite frankly, there is no one single solution as there is no one single solution in capitalism.”
The new legal structures offer multi-stakeholder, flexible legal frameworks allowing social entrepreneurs to embrace their structural and operational differences from charities and conventional businesses, and pursue impact and profit without compromising mission. Consequently, the new structures provide an entirely new way of doing business and open up realms of possibility previously shut to entrepreneurs.
Arthur noted that the emerging legal structures generally follow two trains of thought that exist in the impact investing market place. The first involves building within one’s sphere, defining social value and then establishing that social mission within a legal structure. The second train of thought looks beyond ones sphere and says, “What we need to do is rethink the nature of collaboration in our society”. “This thought process seeks a legal structure that will place social mission at the centre of social collaboration in order to eliminate the fundamental paradox between making money and doing good”, says Arthur. According to Arthur, the first thought is a branding exercise to potentially get a tax break, while the second seeks the ultimate collaboration, to “bring the corporate sector into this space but hardwire a social mission into the process”.
Such collaboration requires a legal structure to come to fruition. In response to this, Arthur candidly stated, “Its all very well mouthing the words blended value and collaboration, but if you haven’t the legal mechanisms that allows you to create that blended value or collaboration then you are whistling in the wind.”
An emerging legal structure in the US that is making such collaboration possible is the L3C−an evolution of the LLC. These structures are so much of an evolution of each other that the programme related investment (PRI) legislation married to an LLC is the same as an L3C. PRI rules stipulate that as long as the primary purpose legally hard-wired into the enterprise is social, it will allow for layered for-profit structures with capital market tools. For mission-driven enterprises, the L3C offers them the ability to blend traditional and philanthropic capital. “Because the L3C is based on LLC law, it opens up the opportunity for international collaboration”, says Arthur Wood. This allows for international stakeholders, even countries, to work together, unlocking the ability to scale efforts and increase effectiveness.
What determines the uptake of any social finance vehicle, however, is how affordable and accessible it is to social entrepreneurs. The new legal structures are just that −easily replicable, accessible and most importantly, cheap. And because of this, they hold the potential to significantly scale the impact investing market globally.
This doesn’t guarantee that the new structures, despite how beneficial they may be, will not be met with apprehension. “There is a danger in anything new by definition.” commented Arthur when asked what he perceives to be the primary risks surrounding the emerging legal structures. Although the new structures are adaptions of existing frameworks, the uptake of these new legal structures will be met with initial hesitation because of the fact that they are just that, new. Furthermore, a wrestling match exists in the impact investing sector, involving two players−evolution and revolution. Arthur Wood is, however, on the side of evolution and more concerned with taking action and adapting existing frameworks, than sitting back and talking about a revolution of systems.
Distortion also poses an additional concern in the uptake and execution of these structures. “We need to ensure the actual practicalities that put the legal structures in place are driven by our sector to avoid distortion.” says Arthur.
The new legal structures usher in a fresh and exciting realm of possibility, making it rather easy to get swept up in the hype and allure of these frameworks. Jumping in line to be the next BCorp or L3C without first doing your homework may leave you unpleasantly surprised. The various structures come with their own set of pro’s and con’s for both entrepreneurs and investors. Although the new structures make room for social enterprises that value profit and social mission, the social enterprise is tasked with juggling two masters, profit and social impact. In some instances the conflict of profit-making and impact goals may lead enterprises to value one over another, potentially leaving investors with little or no return on investment.
By Kelly Notcutt