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Social Enterprise Introduction

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U.S. legal entities traditionally have been formed either as for-profit organizations or as nonprofit organizations.  For-profit organizations are designed to pursue profits and shareholder wealth, while most nonprofit organizations are designed strictly for charitable pursuits and public benefit.  Since 2008, however, twenty-five states and the District of Columbia have enacted statutes authorizing hybrid legal entities—generally, special forms of corporations and limited liability companies[1]—that are designed to pursue both a for-profit business purpose and a beneficial humanitarian and/or environmental purpose.  These special hybrid legal entities have been authorized largely in response to the growth of for-profit “social enterprises:”[2]  organizations devoted to pursuing shareholder wealth and serving a broader humanitarian and/or environmental need.[3] 

Accordingly, included within this section of the website are various materials that can be used to introduce business, law, and other interested students to the concept of “social enterprise” and in particular the hybrid, for-profit legal forms that may be used to conduct a “social enterprise.”  These new hybrid legal forms generally fall into two broad categories:  special types of limited liability companies and special types of corporations.  In the limited liability company category, there are two new hybrid legal forms: the low-profit limited liability company (“L3C”)[4] and the benefit limited liability company.[5]  In the hybrid corporation category, there are three emerging legal forms: the benefit corporation,[6] the flexible purpose corporation,[7] and the social purpose corporation.[8] 

With respect to all of these new hybrid legal forms, it is very important to understand that another often-mentioned entity, a “B Corporation” or “B Corp,”[9] is not a new legal form at all, but rather is a for-profit legal entity that has been certified by B Lab, a Philadelphia based nonprofit organization, as engaging in unusually altruistic business practices (e.g., extraordinary job creation, paying above-market wages, providing a community or public benefit beyond generating revenue, state-of-the-art recycling, reducing carbon footprint, etc.).  Put differently, B Corps are not creatures of state law, but rather are creatures of the B Lab scoring system and certification process.  Because B Corp status is not a legal construct, the materials in this portion of the website do not relate in any way to becoming a B Corp or obtaining status as such.        

Finally, with regard to using any of the new, hybrid legal forms for conducting a “social enterprise,” it is important to keep in mind a well-established, traditional for-profit legal entity:  a regular limited liability company or “LLC.”  Specifically, due to their inherent contract-like flexibility, liability protection, and malleable tax treatment, LLCs have grown to become the dominant legal entity form for all new business organizations[10] and are increasingly being used for social enterprise as well.[11]  Moreover, under the laws of most states LLCs may be formed for “any lawful purpose,” including a socially beneficial or even charitable purpose.  For-profit corporations, however, typically must have a lawful “business purpose” under state law.[12]  The virtually unlimited ability to create varying classes of membership interests with diverse voting and economic rights also makes a traditional LLC an appealing legal form for conducting a social enterprise. 



[1]For a high-level listing and comparison of all the various types of hybrid legal entities that have been authorized across the U.S., see Professor Cass Brewer’s chart posted on SSRN herehttp://papers.ssrn.com/sol3/papers.cfm?abstract_id=2304892.  For a detailed listing and comparison of benefit corporation legislation, Professor Haskell Murray has compiled a chart that also may be found on SSRN herehttp://papers.ssrn.com/sol3/papers.cfm?abstract_id=1988556.  For a thorough bibliography of legal and other resources concerning hybrid organizations and the concept of social enterprise, see Professor Alicia Plerhoples’s social innovation guide posted on SSRN herehttp://papers.ssrn.com/sol3/papers.cfm?abstract_id=2198396.

[2]  Georgia State University’s Professor Dennis Young was writing about social enterprise and the nonprofit sector thirty years ago.  See Dennis R. Young, If Not For Profit, For What? (Lexington Books 1983) (available online here).  Social enterprise in the for-profit sector, however, is a relatively recent phenomenon.  Social enterprise loosely is defined as follows (from Wikipedia, last visited September 9, 2013):  “A social enterprise is an organization that applies commercial strategies to maximize improvements in human and environmental well-being, rather than maximizing profits for external shareholders.  Social enterprises can be structured as a for-profit or non-profit, and may take the form of a co-operative, mutual organization, a disregarded entity, a social business, or a charity organization.”  There is no accepted U.S. legal definition of the term “social enterprise;” however, If enacted, the “Social Enterprise Ecosystem and Economic Development (‘SEEED’) Commission Act,” introduced in 2013 as H.R. 2043, 113th Congress (2013-14), will authorize a Commission to (1) establish criteria for identifying social enterprises for purposes of federal programs, and (2) identify opportunities for the federal government to engage social enterprises in creating jobs and strengthening local economies.  For a brief, informative discussion of potential definitions of “social enterprise” from a legal perspective, see Professor Haskell Murray’s blog post here: http://socentlaw.com/2013/11/defining-social-enterprise/.   Internationally, the U.K. is the leading jurisdiction that, for regulatory reasons, has promulgated a definition of social enterprise.  In fact, the U.K.’s definition limits the term “social enterprise” strictly to for-profit organizations.  For more information, see the following website:  https://www.gov.uk/set-up-a-social-enterprise

[3]  The legal debate about whether special laws and legal entities for social enterprise are either necessary or desirable for the U.S. is a prolific one.  For a brief but helpful introduction to these debates, see the following website:  http://www.theconglomerate.org/2012/05/benefit-corporations-corporate-purpose.html#comment-520994363.  Essentially, many legal scholars and practitioners firmly believe that the existing for-profit and nonprofit forms are sufficient; that business will never “save the world” regardless; and that, even if business could save the world, changes in U.S. business law are not required for a company to pursue both profits and a humanitarian or environmental (or both) mission.  On the other hand, many scholars and practitioners believe that business might “save the world” (or at least help); that the existing legal forms, if not inadequate, can be improved; and that changes in the law to facilitate (but not mandate) social enterprise should be encouraged.  See, e.g., Robert A. Wexler, Social Enterprise:  A Legal Context, 54 Exempt Org. Tax Rev. 233 (2006); Anup Malani & Eric A. Posner, The Case For For-Profit Charities, 93 Va. L. Rev. 2017 (2007); Kent Greenfield & D. Gordon Smith, Debate:  Saving the World with Corporate Law, 57 Emory L.J. 947 (2008); Dana Brakman Reiser, Blended Enterprise and the Dual Mission Dilemma , 35 Vt. L. Rev. 105 (2010); William Callison & Allan W. Vestal, The L3C Illusion: Why Low-Profit Limited Liability Companies Will Not Stimulate Socially Optimal Private Foundation Investment in Entrepreneurial Ventures, 35 Vt. L. Rev. 273 (2010); Brian Galle, Keep Charity Charitable, 88 Tex. L. Rev. 1213 (2010); James Hines Jr. et al., The Attack on Nonprofit Status: A Charitable Assessment, 108 Mich. L. Rev. 1179 (2010); Robert A. Katz & Antony Page, The Role of Social Enterprise, 35 Vt. L. Rev. 59 (2010); Allen R. Bromberger, A New Type of Hybrid, 9 Stan. Soc. Innovation Rev. 48 (2011); Cassady V. Brewer, A Novel Approach to Using LLCs for Quasi-Charitable Endeavors (A/K/A "Social Enterprise"), 38 Wm. Mitchell L. Rev. 678 (2012); Lyman Johnson, Pluralism in Corporate Form:  Corporate Law and B Corps, 25 Regent L. Rev. 269 (2013). 

[4] See Vt. Stat. Ann. tit. 11, § 3001(27) (2013); 805 Ill. Comp. Stat. 180/1-26 (2013); La. Rev. Stat. Ann. § 12:1302.C (2013); Me. Rev. Stat. tit 31, § 1611(2013); Mich. Comp. Laws § 450.4204 (2013); R.I. Gen. Laws § 7-16-76 (2013); Utah Code Ann. § 48-2c-412 (2013); Wyo. Stat. Ann. § 17-29-102(a)(ix) (2013).

[5] Md. Corp. & Ass’ns §§4A–1101 through 4A–1108 (2013); H.B. 2296-A, 77th Or. Leg. Assembly (2013) (which became effective January 1, 2014, but had not been codified prior to submission of this Portfolio for publication).

[6] Ariz. Rev. Stat. § 10-2401 (effective 2015); Ark. Code Ann. § 4-36-101 (2013); Cal. Corp. Code § 14600 ; HB  13-1138 Colo. 69th Gen’l Assembly (effective 2014); Del. Code Ann. Tit 8, §§ 361-368 (2013); Haw. Rev. Stat. § 420D-1 (2013); 805 Ill. Comp. Stat. 40/1 (2013); La. Rev. Stat. Ann. § 12:1801 (2013); Md. Code Ann., Corps. & Ass’ns § 5-6C-07(C) (2013). Mass. Ann. Laws Ch. 156E, § 1; AB89  Nev. 77th Reg. Leg. Sess. (2013); N.J. Stat. Ann. § 14A:18-1 (2013); N.Y. Bus. Corp. Law § 1701 (Consol. 2013); 15 Pa. Cons. Stat. § 3301 (2013); ); H.B. 2296-A, 77th Or. Leg. Assembly (effective 2014); S.C. Code Ann. § 33-38-110 (2013); R.I. Gen. Laws Ann. §§ 7-5.3-1 TO -13 (2013); Vt. Stat. Ann. Tit. 11A, § 21.02 (2013); Va. Code Ann. § 13.1-782 (2013).

[7] Cal. Corp. Code §2602(b)(2) (2013). 

[8] Tex. Bus. Org. Code §§ 1.002(82-A); 3.007; 21.101; 21.401 (2013); Wash. Rev. Code §§ 23B.25.005 TO 23B.25.150 (2013).

[9] See Iv. C. 2. below.

[10]  See Joint Committee on Tax’n, “Selected Issues Relating to Choice of Business Entity” (7/27/12), available at: https://www.jct.gov/publications.html?func=startdown&Id=4478.

[11] See Cassady V. Brewer, A Novel Approach to Using LLCs for Quasi-Charitable Endeavors (A/K/A "Social Enterprise"), 38 Wm. Mitchell L. Rev. 678 (2012).   

[12] For example, the Delaware LLC Act, which is representative of most others, provides that a “limited liability company may carry on any lawful business, purpose or activity, whether or not for profit, with the exception of the business of banking.” Del. Code Ann. Tit. 6, § 18-106(a).  See also Md. Corp. & Ass’ns §4A–201 (same language).  Compare, though, the Oregon LLC Act which provides: “a limited liability company formed under this chapter may conduct or promote any lawful business or purpose which a partnership, corporation or professional corporation as defined in [Or. Rev. Stat. 58.015] may conduct or promote, unless a more limited purpose is set forth in the articles of organization.” Or. Rev. Stat. § 63.074. Oregon corporations must engage in a “lawful business,” and an Oregon partnership is “an association of two or more persons to carry on as co-owners a business for profit.” See Or. Rev. Stat. §§ 60.074(1), 67.005(7).

 

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