Social Entrepreneurship Legal Resource Materials

Entrepreneurship Law Editorial Team

Books

Terry L. Besser, THE CONSCIENCE OF CAPITALISM: BUSINESS SOCIAL RESPONSIBILITY TO COMMUNITIES (2002).

Abstract:  Exploring the notion of whether doing good is good for business, the author surveys the Iowa business community and finds that business owners and managers often act out of a sense of community spirit and a motivation to better the common good.

Marc J. Lane, Social Enterprise:  Empowering Mission-Driven Entrepreneurs  (2011).

Abstract (from the ABA) : Today's economy has forced many charities to cut back on their service. Charitable giving is also down, and federal and state governments are pulling back on their support of the social sector. This trend has drastically changed the business model for many nonprofit organizations, requiring them to become innovative and entrepreneurial in order to survive. Increasingly, this means engaging in "social enterprise," and defining success in terms of both financial and social returns. At the same time, many for-profit businesses are also finding they can generate significant revenue while addressing social needs. Moreover, financial incentives, tax benefits and more can be realized through social enterprise activities.

This important and timely book describes the special legal considerations lawyers must know when advising for-profit or not-for-profit entities that engage in "socially conscious" activities. From funding, organizational structure, business models, governance, and tax treatments, this book is the complete legal guide to social enterprise.  

The future demands an entrepreneurial approach to business if organizations wish to survive. Social enterprise is the heart of much of that activity. If your client is involved in, or simply considering, starting a social enterprise, this book is the essential guide to successfully navigating the state and federal rules involved. It's also an important resource for nascent and seasoned social entrepreneurs, donors, investors and other stakeholders who see social enterprise as a potent tool to drive positive social change.

Thomas A. McLaughlin, NONPROFIT MERGERS AND ALLIANCES: A STRATEGIC PLANNING GUIDE (2010).

Abstract (from product description at Amazon.com):  This book describes a context for nonprofit mergers and discusses the forces that shape their use. The author demonstrates that nonprofit mergers are fundamentally different from corporate mergers, that they can be of immense benefit to the community as well as the merging organizations, and that failure to merge can be disastrous for everyone. The book focuses on the concerns of the nonprofit sector: achieving the mission, retaining tax-exempt status, behaving responsibly in the community. The author shows nonprofit managers and board members how to make their way through the merger process without repeating Wall Street misbehavior. Using real-world examples and case studies, the book offers practical, step-by-step guidance through the merger process from preliminary considerations to actual implementation.

Amir N. Licht & Jordan I. Siegel, THE SOCIAL DIMENSIONS OF ENTREPRENEURSHIP, in Oxford Handbook of Entrepreneurship (Mark Casson & Bernard Yeung, Eds.2006).

Abstract:  Entrepreneurship has always been a key factor in economic growth, innovation, and the development of firms and businesses. More recently, new technologies, the waning of the "old economy", globalization, changing cultures and popular attitudes, and new policy stances have further highlighted the importance of entrepreneurship and enterprise.  Entrepreneurship is now a dynamic and expanding area of research, teaching, and debate, but there has been no standard reference work which is suitable for both established scholars and new researchers. This book fills that gap. All the major aspects of entrepreneurship are covered, including: the start-up and growth of firms,  financing and venture capital,  innovation, technology and marketing,  women entrepreneurs,  ethnic entrepreneurs,  migration, small firm policy, the economic and social history of entrepreneurship. This is a comprehensive review of state-of-the-art research in entrepreneurship, written by an international team of leading scholars, and will be an essential reference for academics and policy makers, as well as being suitable for use on masters courses and doctoral programs.

Beverly Schwartz, Rippling: How Social Entrepreneurs Spread Innovation Throughout the World (2012).

Abstract (adapted from publisher): Drawing on the knowledge and experience of working with hundreds the world's top social change leaders in all fields, Beverly Schwartz presents a model for change based on five proven principles that any individual leader or organization can apply to bring about deep, lasting and systematic change. The book shows how to activate the type of change that is needed to address the critical challenges that threaten to destroy the foundations of our society and planet in these increasingly turbulent times. These actionable principles are brought to life by compelling real-life stories. Schwartz provides a road map that allows anyone to become a changemaker,

Andrew Wolk, Anand Dholakia & Kelley Kreitz, Building a Performance Measurement System: Using Data to Accelerate Social Impact (2009).

Abstract (from Amazon Product Description): If an organization is dedicated to social impact, it is challenging to evaluate progress on achieving the mission. A performance measurement system can provide an organization with the internal knowledge necessary to help accelerate the organization’s social impact, in addition to generating performance data that is increasingly required by funders.

Andrew Wolk and Kelley Kreitz, BUSINESS PLANNING FOR ENDURING SOCIAL IMPACT: A SOCIAL-ENTREPRENEURIAL APPROACH TO SOLVING SOCIAL PROBLEMS (2008).

Abstract (from publisher):  This book applies the strategic rigor and financial savvy of traditional private-sector business planning to social problem solving. This practical guide provides an introduction to business planning for enduring social impact and leads readers through a four-step process for creating an actionable business plan. The guide is an essential tool for organizations seeking to: define organizational focus and strategy and establish a clear road map; build a financially sustainable model by creating a plan to establish reliable streams of philanthropic support, earned income, and/or in-kind resources; establish rigorous methods of measuring impact for the organization and its stakeholders; make data-driven decisions that lead to improvements to the organization and its activities; and build partnerships with stakeholders in all three sectors public, private, and nonprofit.

Articles

James Austin & Ezequiel Reficco, Corporate Social Entrepreneurship, 11 Int'l J. Not-for-Profit L. 86 (2009).

Abstract (from authors): CSE emerges from and builds on three other conceptual frameworks: entrepreneurship, corporate entrepreneurship, and social entrepreneurship. CSE's conceptual roots begin with Schumpeter's vision that nations' innovation and technological change emanate from individual entrepreneurs with their unternehmergeist or fiery spirit generating “creative destruction” of old ways with new ones (1912, 1934, 1942). Stevenson (1983; 1985) provided a different definition of Entrepreneurship: “the pursuit of opportunity through innovative leverage of resources that for the most part are not controlled internally.” Schumpeter had projected that the engines of entrepreneurship would shift from individuals to corporations with their greater resources for R&D, which did happen. However, over time corporate bureaucracy was seen as stifling innovation. To remedy this, a focus on Corporate Entrepreneurship within companies emerged, with Covin and Miles (1999) defining it as “the presence of innovation with the objective of rejuvenating or redefining organizations, markets, or industries in order to create or sustain competitive superiority.” In parallel, the concept of Social Entrepreneurship emerged. Dees (1998) defined it as “innovative activity with a social purpose in either the private or nonprofit sector, or across both.” Others have offered conceptual refinements (Bornstein 2004; Nicholls 2006; Martin and Osberg Spring 2007; Light 2007; Elkington and Hartigan 2008; Ashoka 2009). CSE integrates and builds on the foregoing concepts and has been defined by Austin, Leonard, Reficco, and Wei-Skillern (2006) as “the process of extending the firm's domain of competence and corresponding opportunity set through innovative leveraging of resources, both within and outside its direct control, aimed at the simultaneous creation of economic and social value.” The fundamental purpose of CSE is to accelerate companies' organizational transformation into more powerful generators of societal betterment.

James L. Baillie, Fulfilling the Promise of Business Law Pro Bono, 28 Wm. Mitchell L. Rev. 1543 (2002).

Abstract:  Business law pro bono - legal services provided on a pro bono basis by business lawyers in aid of community economic development - is an idea whose time has come. Although it is not a new concept for business law pro bono services to be provided on an occasional basis, for the most part, the organized provision of these services is new. Recent years have seen a dramatic increase in the number of pro bono programs specifically devoted to providing business law services and, correspondingly, a dramatic increase in the amount and variety of those services by volunteer lawyers.

J. William Callison & Allan W. Vestal, The L3C Illusion: Why Low-Profit Limited Liability Companies Will Not Stimulate Socially Optimal Private Foundation Investment in Entrepreneural Ventures, 35 Vt. L. Rev. 273 (2010).

Abstract (adapted from the Introduction): Vermont enacted the Nation's first “low-profit limited liability company” (L3C) legislation in 2008. Since then several other states have appended L3C provisions to their limited liability company (LLC) statutes. This Article proceeds as follows: Part I discusses the law and policy of private foundations and program-related investments (“PRIs”), the background against which the L3C is set. Part II discusses L3Cs from a state law perspective, aligns them with PRI concepts, and discusses attempts to change federal PRI law to synchronize federal tax law with the state law form. Part III provides some thoughts concerning the “evolutionary biology” of LLC law, discusses how L3C legislation came to pass in several states, and considers the results in other states where there has been critical examination and opposition. Part IV discusses the mischief wrought by L3Cs in the current environment. We conclude by restating our belief that the L3C experiment is flawed and should be abandoned unless and until the federal PRI rules change in a way that gives meaning to L3Cs. This abandonment would be accomplished by the elimination of the L3C form in the few states that have enacted legislation and the termination of the L3C adoption process in the many states that have not enacted legislation.

Cassady V. ("Cass") Brewer, A Novel Approach To Using LLCs For Quasi-charitable Endeavors (a/k/a "Social Enterprise"), 38 Wm. Mitchell L. Rev. 678 (2012).

Abstract (adapted from author): This article sets forth a hypothetical social enterprise project in need of capital. It summarizes the principal advantages and disadvantages of using either a nonprofit entity or a for-profit entity to pursue the project. Finally, the article describes a new, proposed "contract hybrid" LLC structure that potentially reconciles the competing for-profit and nonprofit capital and other demands of the project.

Danielle M. Conway, Promoting Indigenous Innovation, Enterprise, and Entrepreneurship Through the Licensing of Article 31 Indigenous Assets And Resources, 64 SMU L. Rev. 1095 (2011).

Abstract (from author): One means of implementing the goals and objectives of the Declaration [on the Rights of Indigenous Peoples ] and operationalizing the use of indigenous assets and resources in a collective entrepreneurial effort is the use of licensing to govern transactions, create value, and promote the exercise of indigenous management and control over assets and resources. Focusing specifically on the controlled use of valuable indigenous assets and resources, Part II of this Article describes indigenous entrepreneurship and innovation pre-colonization, the negative effects on indigenous social and economic development post-contact, and colonization's interruptive impact on innovation and enterprise across indigenous diasporas. Part II also presents a discussion about the revival of indigenous innovation and enterprise through the rekindling of traditional knowledge and practices within indigenous communities. Part III analyzes the rights reasserted by Indigenous peoples in the Declaration on the Rights of Indigenous Peoples. The discussion specifically addresses the framework, purpose, and goals of the Declaration to promote authority and control over indigenous lands, resources, and assets. Moreover, there is an examination of the perceived paradox between indigenous values and indigenous participation in the mainstream marketplace. Part IV focuses on licensing as a mechanism to both implement the goals and objectives of the Declaration and to reassert indigenous authority and control over indigenous assets and resources. Part V addresses perceived obstacles to implementing the Declaration through use of licensing. Finally, Part VI concludes with observations and recommendations for universal implementation of the Declaration on the Rights of Indigenous Peoples to secure self-determination through, among other relevant public policy initiatives, indigenous entrepreneurship and economic development.

Matthew F. Doeringer, Fostering Social Enterprise: A Historical and International Analysis, 20 Duke J. Comp. & Int'l L. 291 (2010).

Abstract (from author): Several states in the United States are attempting to nurture the growth of social enterprise by adopting statutes which enable the registration of Low-Profit Limited Liability Companies (“L3Cs”). The L3C is the first American legal form to embrace and facilitate social enterprise. However, Belgium and the United Kingdom created legal forms to achieve similar ends many years prior to the creation of the L3C. The Belgian and U.K. experiences with these legal forms as well as the historical treatment of social enterprise in the United States provide lessons for how the United States should regulate the L3C and social enterprise in general. This paper tracks the development of social enterprise in the United States and Europe and ultimately proposes that effective government policies need to stimulate capital investment in social enterprise and generate greater public understanding of the sector's potential benefits. Part I discusses the history and development of social enterprise as a concept and as a sector of the economy in the United States and Europe. Part II discusses the difficulties of adapting the nonprofit and the for-profit corporate forms to entities operating as social enterprises in the United States. Part III discusses social enterprise in Europe and how the governments in Belgium and the United Kingdom have attempted to stimulate growth of social enterprise by creating new business entities which bridge the gap between nonprofit and for-profit forms. Part IV discusses the recent government effort to aid social enterprise in the United States through the creation of the L3C and the difficulties which have slowed the impact of the L3C. Part V discusses lessons from the experiences in Belgium and the United Kingdom which can help guide social-enterprise policy in the United States.

Leslie Dougherty, Putting Poverty in Museums: Strategies to Encourage the Creation of the For-Profit Social Business, 29 B.C. Third World L.J. 357 (2009).

Abstract (from author): In Creating a World Without Poverty, Muhammad Yunus introduces the social business model which aims to provide a social benefit, not just a monetary profit. This model is distinct from a typical non-profit charity because investors expect to eventually recover their financial contributions to the social business. Yunus describes the Danone Communities mutual fund's ability to protect the company from liability to shareholders for lack of a monetary profit while simultaneously providing food to malnourished children in Bangladesh. This Comment examines two different successful social business structures and argues that companies have yet to embrace this innovative model due to a lack of clear guidelines for this type of business in United States corporate law. The enactment of mutual fund regulations encouraging the creation of this for-profit sustainable social business would allow it to be very successful in reducing poverty.

Roger M. Groves, New Age Athletes as Social Entrepreneurs: Proposing a Philanthropic Paradigm Shift and Creative Use of Limited Liability Company Joint Ventures, 11 Wake Forest J. Bus. & Intell. Prop. L. 213 (2011).

Abstract: This article examines how former professional basketball players have been able to fund philanthropic projects in their communities. Through the use of different business organizations and tax strategies, they have been able to maximize the return on their brand of social entrepreneurship.

J. Haskell Murra & Edward I. Hwang, Purpose With Profit: Governance, Enforcement, Capital-Raising and Capital-Locking in Low-Profit Limited Liability Companies, 66 U. Miami L. Rev. 1 (2011).

Abstract (adapted from authors): This article begins by considering the growing social enterprise movement, the limitations of existing legal forms in accommodating social enterprise, and the potential benefits of new legal entities to carry out simultaneous for-profit and nonprofit missions. It also examines how the Low-profit Limited Liability Company (L3C) legal form is structurally designed to overcome existing legal deficiencies and work within the existing business and legal landscape. Moreover, it addresses the concerns of the most strident faultfinders of the L3C and the policy implications of the continued adoption of L3C legislation. The article next compares and contrasts the seemingly conflicting fiduciary duties in the for-profit and not-for-profit areas, before moving on to propose a blended fiduciary framework for hybrid business forms, such as L3Cs. It submits that a company can have multiple purposes, but can have only one primary master. While deviations from the path should be allowed under the business judgment rule, the authors submit that managers of L3Cs should focus primarily on the organization's “charitable purpose.” Similar to the rights of members of profit-focused LLCs, they believe that members of L3Cs should have standing to sue for a breach of fiduciary duty by the entities' managers. Finally, the article examines the capital-raising and profit-payout puzzles faced by L3Cs and largely unaddressed by early commentators on the L3C form. The article concludes that while traditional profit-focused investors may not be well suited for investment in L3Cs, the L3C form is still viable.

Susan R. Jones, Promoting Social and Economic Justice Through Interdisciplinary Work in Transactional Law, 14 Wash. U. J.L. & Pol’y 249 (2004).

Abstract: This piece examines interdisciplinary collaboration in small business as a component of community economic development.  In spite of the reality that entrepreneurs require services from multiple professionals, many law schools devote insufficient time to teaching across disciplines. In light of the rise of small business clinical programs in law schools, the article considers how interdisciplinary efforts in transactional law can be organized and sustained. One manifestation of this is the ethical discussion of multidisciplinary and multijurisdictional practice.

Robert A. Katz & Antony Page, The Role of Social Enterprise, 35 Vt. L. Rev. 50 (2010).

Abstract (adapted from the Introduction):  A market economy predictably under-produces certain urgent public or collective goods, such as a clean environment. It also perpetuates gross inequalities in resources among people and across regions. Recently, there has been growing interest in privately-led approaches that use business methods and forms for the express purpose of repairing society and which go under the labels of social enterprise and social entrepreneurship.

Part I of this Article examines nonprofit organizations. Part II considers what for-profit social enterprises might be, how they can address market shortcomings, and why they might sometimes do so more successfully than nonprofit social enterprises. Part III distinguishes between two approaches to the for-profit social enterprise's distinct value proposition, with each pushing the law of social enterprise in a different direction. The first approach is grounded in the organizational law of nonprofit and charitable organizations. The second approach is grounded in the broader ambitions of social entrepreneurship, which is to increase supply of public goods by transforming markets and preferences thereby creating a new more socially-optimal equilibrium. This Article concludes that, though at the organizational level the for-profit social enterprise has some clear comparative advantages, we should be wary of regulation adapted from the nonprofit context that may dilute these advantages.

Thomas Kelley, Law and Choice of Entity on the Social Enterprise Frontier, 84 Tul. L. Rev. 337 (2009-2010).

Abstract: Social entrepreneurs are people who envision widespread, systematic social change and who attack society’s ills at the roots employing the spirit and the tools of entrepreneurship. They reject the traditional boundaries between the nonprofit and for-profit sectors and carry out their plans through so-called hybrid social enterprises, which combine the soul of nonprofit organizations with the discipline and business savvy of for-profits. Although social entrepreneurs generally are driven by a desire to do good, they view themselves as business people who are trying to achieve double bottom-line (financial and social) or triple bottom-line (financial, social and environmental) results. Why should the emergence of these new hybrid social enterprises be of particular concern to lawyers? Because their creators say that they inhabit a social frontier, sometimes referred to as the “emerging fourth sector,” where outmoded laws and inappropriate, old-style legal entities hamstring their socially transformative plans. With increasing vehemence, they are demanding new laws, particularly new types of hybrid business entities, to give legal structure to the emerging fourth sector. This paper describes the social enterprise frontier, paying particular attention to a recent trend whereby social entrepreneurs form their ventures as for-profit companies even though their ambitions are largely charitable. The paper then critically examines various proposals for creating new types of hybrid for-profit/nonprofit entities to provide a legal structure for fourth sector ventures. The paper concludes that a very recent legal innovation, the Low Profit Limited Liability Company (“L3C”), holds particular promise for meeting the needs of social entrepreneurs and the emerging fourth sector.

Daniel S. Kleinberger, A Myth Deconstructed: The “Emperor’s New Clothes”on the Low-Profit Limited Liability Company, 35 Del. J. Corp. L. 879 (2010).

Abstract: In 2008, Vermont enacted the first “low-profit limited liability company” statute, and since then seven other states have followed. L3C proponents tout the device as: (i) a break-through in charitable giving, enabling “socially beneficial enterprises” to leverage foundation money to attract market-rate investors through “tranched investing;” (ii) a simple, wise, and useful development in the law of limited liability companies; and (iii) a method destined to be fast-tracked for special treatment under the provisions of the Internal Revenue Code (“Code” or “IRC”) dealing with “Program-Related Investments” (“PRI”) by charitable foundations.  

Unfortunately, these glowing characterizations are each flatly wrong. The L3C is an unnecessary and unwise contrivance, and its very existence is inherently misleading. The notion that an L3C should have privileged status under the Code is inescapably at odds with the key policies that underpin the relevant Code sections. The L3C is not on track (let alone a fast track) to any special status under the Code. Moreover, due to technical flaws, the L3C legislation adopted to date is nonsensical and useless.

This article carefully debunks each major tenet of the L3C “movement” and reveals the legal and practical realities under “The Emperor's New Clothes.” Using foundation funds to offer market-rate returns to “tranched” investors is, at best, a complicated device; not appropriate for “branding” and simplistic appeals to social conscience. When a foundation contemplates making a program-related investment, the matter requires careful, individualized, professional assessment, not reliance on a branded template. In this context, the L3C is but a snare and a delusion.

Gail A. Lasprogata & Marya N. Cotton, Contemplating "Enterprise": The Business and Legal Challenges of Social Entrepreneurship, 41 Am. Bus. L.J. 67 (2003).

Thomas H. Morsch, Discovering Transactional Pro Bono, 72 UMKC L. Rev. 423 (2003).

Abstract (from author): With some exceptions (for example, routine immigration and social security assistance), almost all of the privately supported programs provide representation for persons involved in judicial or contested administrative proceedings. For this reason, there are unlimited opportunities for trial lawyers to fulfill their pro bono objectives. Until recently, however, opportunities were more limited for real estate, banking, tax and corporate lawyers, who did not feel that they had the requisite skills and practical experience to appear in court or before an administrative tribunal. In many cases where there is truly no adverse proceeding to face, these concerns are largely unwarranted. Nevertheless, most lawyers who practice business or corporate law believe they have fewer pro bono service opportunities than trial lawyers.

Antony Page & Robert A. Katz, Freezing Out Ben & Jerry: Corporate Law and the Sale of a Social Enterprise Icon, 35 Vt. L. Rev. 50 (2010).

Abstract (adapted from the Introduction): Ben & Jerry's Homemade, Inc. was once the darling of proponents of social enterprise and social entrepreneurship. It was a for-profit corporation that seemingly did not put profits first. Rather, it pursued, in the parlance, a “double bottom” line, seeking to advance progressive social goals, while still yielding an acceptable financial return for investors.

The adulation dropped off significantly in 2000, when Ben & Jerry's was acquired by Unilever, a multi-national conglomerate. It contributed to doubts about the long-term viability of for-profit firms that pursue a double bottom line, sometimes known as “for-profit social enterprises” or “hybrid enterprises.”  

This Article makes several claims. We reject the assertion that corporate law compelled the sale-or sellout -of Ben & Jerry's to Unilever. When Unilever presented its offer to Ben & Jerry's board, it had two options: accept the offer or vigorously attempt to thwart it-most notably by testing the anti-takeover defenses and other liability shields already in place.   

Part I of this article provides a short history of Ben & Jerry's from beginning to end as an independent company, focusing on what was perceived to make the company different. Part II discusses Ben & Jerry's acquisition by Unilever and considers the claim that this sale was compelled by corporate law. This claim, we argue, rests on doubtful legal and factual analyses. If this claim is in fact correct, it is only because Ben & Jerry's directors made readily avoidable mistakes, both at the time of the sale and fifteen years earlier. Part III looks at the consequences of the sale and draws conclusions for present day entrepreneurs. By agreeing to be acquired by Unilever, Ben & Jerry's may have advanced its social mission more effectively than it could have done on its own. Finally, in Part IV we identify some lessons that today's social entrepreneurs can draw from Ben & Jerry's experience.

Dana Brakman Reiser, Blended Enterprise and the Dual Mission Dilemma, 35 Vt. L. Rev. 163 (2010).

Abstract (adapted from the Introduction):  Achieving and governing truly blended enterprise means consistently serving two masters (profits and social good), which is notoriously difficult. This essay reviews and compares how traditional charity and business forms, as well as several of the emerging hybrid forms, attempt to structure and solve this dual mission dilemma, and will offer some thoughts on how to improve them.

Elizabeth Schmidt, Vermont’s Social Hybrid Pioneers: Early Observations and Questions to Ponder, 35 Vt. L. Rev. 105 (2010).

Abstract (adapted from the Introduction):  This Article examines the experiences of the early adopters of the L3C business form. Through surveys, phone conversations, and examinations of web sites, the author explored the reasons these social hybrid pioneers chose the L3C over alternatives such as a traditional LLC or a 501(c)(3) tax-exempt organization.   

These findings suggest that the priorities of the entrepreneurs who adopted this business form were somewhat different from those who invented it. Nevertheless, the L3C gives voice to these entrepreneurs ' business values in a way that no other current business form does. These findings can inform policy decisions about the future of the L3C and provide substance to discussions about the L3C and other forms of social enterprise.   

Part I of this Article examines the legal and theoretical basis for the L3C . It describes the genesis of the idea, the typical statute, the strategy behind its adoption, and the criticisms that have been raised. Part II introduces the study the author undertook to test some of these assumptions, setting forth the methodology of the study and describing the organizations that responded. Part III describes the experiences of the L3Cs that responded-why they chose this business form and their reactions once they began to use it-in order to begin to test the assumptions and make early observations. Part IV draws on those observations and suggests questions for further discussion among policy makers, academics, and social entrepreneurs.

Levinus Timmerman, Matthijs de Jongh & Alexander Schild, The Rise of the Social Enterprise: How Social Enterprises Are Changing Company Law Worldwide (2011), available at http://ssrn.com/abstract=1795042.

Abstract (from the authors): This paper explains the increasing popularity of social entrepreneurship and analyzes its company law consequences. Faced with tight budgets, governments are looking to the private sector to develop businesses that serve the interests of the public. Social entrepreneurship is gaining momentum as it enables people to make a living while pursuing an objective that adds meaning to their lives. Social enterprises are confronting two key challenges. First is the need for funding. The emergence of a social investment sector requires a long-term commitment from government agencies. Second, social enterprises must balance the interests of investors with the social mission.

Legislators in many countries are creating specific legal entities to cater to the need for legal entities in which the dual purpose of social enterprises is regulated. A worldwide trend is for company law to provide a means of addressing problems relating to the dual purpose by defining the rights and obligations of directors and shareholders. Furthermore, a sufficiently flexible ‘new company-law product’ offering a pre-negotiated set of rules tailored for social enterprises can reduce incorporation costs for entrepreneurs structuring their businesses. A special legal entity for social enterprises also enables entrepreneurs to carry out their mission by giving them their own legal entity and allowing them to use their legal entity as a marketing tool and a competitive advantage. Accordingly, new legal entities improve the options open to entrepreneurs structuring their social businesses.

John Tyler, Negating the Legal Problem of Having “Two Masters”; A Framework for L3C Fiduciary Duties and Accountability, 35 Vt. L. Rev. 117 (2010).

Abstract (adapted from the Introduction):  The low-profit limited liability company (L3C) is a new business form that unites in one enterprise two principles: pursuing charitable, exempt purposes and generating and distributing profits. Such arguably conflicting, dual purposes seem to create ambiguity and exacerbate the problem of appearing to serve “two masters.” This conflict and ambiguity has been the nature of purportedly hybrid enterprises, particularly for-profit forms whose operations are considered charitable or that operate with “social” missions.  

Unlike more traditional business operations, hybrid pursuits have generally functioned in clouds of confusion and difficulty for investors, managers, creditors, policy makers, and regulators. Properly understood and implemented, one of the innovations of the L3C is how the enabling statutes properly order priorities in a way that imposes fiduciary responsibilities and makes available accompanying enforcement tools.   

In an effort to facilitate movement toward that predictability and consistency, this Article proposes a framework for the L3C's fiduciary duties and their enforcement. Part I of this Article describes the L3C and its most relevant characteristics. It also tries to correct misunderstandings about the L3C and its application that could undermine the form and proper application of its fiduciary duty regiment. Recognizing that the L3C is a hybrid and that its conceptions of fiduciary duty evolve from more traditional forms, Part II presents these underlying fiduciary duty contexts and principles, including whether the duty of for-profit directors and managers is to maximize owner value or to operate the firm as a social entity. Part III more explicitly proposes an approach to defining L3C fiduciary duties, which distinguishes it from existing forms as a legal innovation. Part IV finally discusses approaches to enforcement and ensuring accountability for pursuing those duties, particularly with regard to preserving the priority of charitable purpose.

Online Resources

Ohio University, Regional Nonprofit Alliance at the Voinovich School of Leadership and Public Affairs, Financial/Legal Issues
http://ournonprofitalliance.org/financialandlegal.aspx

Social Enterprise Alliance – Where Mission Meets the Marketplace, at https://www.se-alliance.org/

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