Social Entrepreneurship Legal Resource Materials
Entrepreneurship Law Editorial Team
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).
(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).
(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.
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.
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.
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.
Jaclyn Cherry, Charitable Organizations and Commercial Activity: A New Era Will the Social Entrepreneurship Movement Force Change? 5 J. Bus. Entrepren. & L. 345 (2012).
Abstract (by author): It is no longer a new trend for charitable organizations to become involved in commercial activities. Thousands of nonprofit organizations have embraced the social entrepreneurial concept and have either created “commercial” type ventures as part of their nonprofits, have created spin-off organizations or subsidiary organizations, or have moved into the new area of hybrid organizations. Because there are no clear rules or guidelines for dealing with this issue, the third sector finds itself with rogue components and a spin-off group of hybrid organizations being loosely termed “social entrepreneurs.” Though these groups have grown in numbers in recent years, they have faced their own trials and tribulations, and success has been mixed. The purpose of this article is to take a broad look at where we are now as a result of the continuing confusion regarding the “commerciality doctrine”, the test being used by courts to interpret the operational test of IRC § 501(c)(3), which has pushed many an organization into these murky waters. It will focus on three areas influencing and defining organizations that are struggling with the law in this sector: 1) it will briefly define commercial activity in terms of social entrepreneurship and provide examples of organizations that have entered this hybrid sector as L3C Organizations and B Corporations; 2) it will give an overview of the law that has developed as the “commerciality doctrine”; and 3) it will discuss the unrelated business income tax and suggest that this test needs to be utilized by courts in conjunction with the “commerciality doctrine” for there to be any semblance of order. Finally, this article concludes by suggesting that changes within the system are overdue and proposes a three-part analysis to be used going forward.
Christen Clarke, California's Flexible Purpose Corporation: A Step Forward, A Step Back, or No Step at All? 5 J. Bus. Entrepren. & L. 301 (2012).
Abstract (by author): The roads of social welfare and commercial enterprise have come to an intersection in recent years. Laws governing corporations are expanding to make room for new forms of business entities that seek to satisfy both social and financial goals. The two most prominent “hybrid” business forms are the Low Profit Limited Liability Company and the Benefit Corporation. The newest hybrid entity to take effect is the Flexible Purpose Corporation, which was introduced in California at the beginning of 2012. With the existence of hybrid organizations that already fit into the mold of Corporations and Limited Liability Companies, is there really a need for this new Flexible Purpose Corporation entity?
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).
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.
Saul Estrin, Tomasz Mickiewicz & Ute Stephan, Entrepreneurship, Social Capital, and Institutions: Social and Commercial Entrepreneurship Across Nation, 73 Entrepren. Theory & Prac. 479 (2013), available at http://ssrn.com/abstract=2253124.
Abstract (by authors): The authors model and test the relationship between social and commercial entrepreneurship drawing on social capital theory. The paper proposes that the country prevalence rate of social entrepreneurship is an indicator of constructible nation‐level social capital and enhances the likelihood of individual commercial entry. It is further posited that both social and commercial entrepreneurial entry is facilitated by certain formal institutions, namely strong property rights and (low) government activism, albeit the latter impacts each of these types of entrepreneurship differently. The authors apply bivariate discrete choice multilevel modeling to population‐representative samples in 47 countries and find support for these hypotheses.
Ryan J. Gaffney, Hype and Hostility for Hybrid Companies: A Fourth Sector Case Study, 5 J. Bus. Entrepren. & L. 329 (2012).
Abstract (by author): The traditional three-sector ownership model of society grows outmoded. The prevalence of quasi-governmental agencies, public-private partnerships, and government bailouts blurs the line between the public and private sectors. Of concern to this article, however, is the blurring between the private and nonprofit sectors. The cross-pollination is so widespread that a call stands to amend the existing model with an “emerging fourth sector.” The social entrepreneurs attempting to bridge the gap between sectors face limitations from the outset of their venture; legislators did not design traditional legal entities for a “double bottom line” that includes social impact as well as profit. Because the demand exists, and because a lethargic legislative response will not hinder the entrepreneurial spirit, these pioneers have attempted to form hybrids under existing legal frameworks. Complexity and cost, however, significantly deter this avenue of social enterprise. Consequently, state legislatures have begun to address the need for legitimate hybrid alternatives. The two business forms attracting the most legal, legislative, and media attention are the Low-profit Limited Liability Company (L3C) and the Benefit Corporation (B Corporation). The L3C, a Limited Liability Company (LLC) hybrid, exploits the LLC's organizational flexibility, while attracting capital for the actual enterprise through Program Related Investments. The B Corporation is a corporation hybrid that permits a company's board and management to contract around the rule of profit-maximization. While both frameworks have merit, they are at once competing for the same share of public-consciousness and legislative attention. The author contrasts the two against the backdrop of the WorldOne case.
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 Murray, Choose Your Own Master: Social Enterprise, Certifications, and Benefit Corporation Statutes, 2 Am. U. Bus. L. Rev. 1 (2012).
Abstract (by author): In the wake of the most recent financial crisis, interest in social enterprise has increased exponentially. Disillusioned with the perceived shareholder wealth focus of corporate law, entrepreneurs, investors, customers, and governments have become more receptive to new paradigms. In the past four years, nineteen states have passed at least one of five different types of social enterprise statutes and many additional states are considering similar legislation. Focusing primarily on the benefit corporation form, this Article examines three main issues: (1) whether social enterprise statutes are potentially useful; (2) how social enterprise law can be improved; and (3) whether the social enterprise movement will be sustainable. First, regarding usefulness, this Article recognizes that the traditional legal framework already provides social entrepreneurs most of the flexibility they seek, but posits that the social enterprise statutes may better combat perceptions of a shareholder wealth maximization norm arising from existing for-profit corporation law (especially in Delaware). As a potential alternative to social enterprise statutes, this Article suggests that states like Delaware could simply amend their existing corporate codes to expressly allow for a societal-or environmental-focused objective in a corporation's charter. Second, regarding improvements to existing social enterprise law, the Article suggests: (i) statutorily requiring social entrepreneurs to choose their own primary master; (ii) recognizing modified versions of traditional corporate law concepts; (iii) lowering transaction and uncertainty costs; and (iv) eliminating or modifying certain mandatory rules. Third, regarding sustainability, this Article concludes that the most intensive social enterprise branding efforts should be left to the private sector organizations like B Lab; and social investors, perhaps using new vehicles like crowdfunding and Social Impact Bonds, must fill the funding gap left by hesitant traditional investors.
J. Haskell Murray & 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.
Christopher D. Hilton, Low-Profit Limited Liability Companies (L3cs): Many Traps for the Unwary Social Entrepreneur, 87 Tul. L. Rev. 169 (2012).
(Abstract by author): Amid a sluggish economy and fiscal challenges at every level of government, the low-profit limited liability company (L3C) has spread rapidly over the past four years, promising a way to spur investment in small businesses and achieve socially beneficial goals with minimal governmental expense or oversight. The L3C's calculated and focused marketing campaign has convinced eight states, including Louisiana, to adopt this new business structure, but the substance of this corporate form leaves much to be desired. Although the L3C is designed to combine investment capital from nonprofit foundations and private investors, the current L3C laws fail to deliver on that promise. The L3C business form, with its distortion of tax policy, inherently conflicting goals, and intractable governance problems, offers nothing but pitfalls and obstacles to the socially beneficial, hybrid enterprises that it purports to help.
Lloyd Hitoshi Mayer & Joseph R. Ganahl, Taxing Social Enterprise (Notre Dame Legal Studies Paper, No. 1311, 2013), available at http://ssrn.com/abstract=2256539.
Abstract (by authors): The fairly strict divide in the United States between for-profit and nonprofit forms presents a quandary for many entrepreneurs who want to combine doing good with doing well. On the one hand, for-profits offer great flexibility and access to capital and so attract entrepreneurs who would like to take advantage of the ability of for-profits to scale up rapidly to meet growing demand. At the same time, however, for-profit forms also limit entrepreneurs’ ability to engage in philanthropy, due to the fiduciary duties managers owe to the equity holders. On the other hand, nonprofits offer their founders the freedom to prioritize public benefit but limit both their access to capital, in large part due to the bar on equity financing for a nonprofit, and their flexibility in addressing changing societal needs as a result of constraints in the law designed to deter nonprofits from straying into activities unrelated to their narrow primary mission. Hybrids — low-profit limited liability companies, benefit corporations, and other related forms — have been touted as the “both-and” solution to this problem by marrying the capital and innovation that results from the ability to generate a profit for investors with the public benefit goals that characterize most nonprofits. Since the first hybrid enabling law was passed in Vermont in 2008, the number of states offering hybrid forms has grown steadily, as has the number of entrepreneurs choosing statutory hybrids as a middle road between the for-profit and the nonprofit. Plaudits for and criticism of the hybrid form have also proliferated. Proponents have lauded their ability to facilitate socially conscious enterprise. Detractors have questioned the viability of the hybrid form and have suggested that they create more fiduciary conflicts than they resolve. To date, however, there has been no serious scholarly publication addressing the appropriate tax treatment of hybrid entities even though some supporters of hybrids have asserted that these forms deserve beneficial tax treatment. In this Article, we intend to close that gap by thoroughly examining the arguments for tax preference and the likely consequences that would flow from offering such preference. We accept the fact that hybrid forms have gained a firm foothold in the legal landscape and expect that they will increase in prominence and influence. We contend, however, that offering nonprofit-like tax benefits to hybrid entities will likely have a deleterious effect, not only on the charitable sector and the public fisc, but possibly even on hybrids themselves. The Article concludes with some proposals for possible modifications to existing tax laws that would acknowledge hybrids’ virtues while not exacerbating their potential weaknesses.
Susan R. Jones, Promoting Social and Economic Justice Through Interdisciplinary Work in Transactional Law, 14 Wash. U. J.L. & Pol’y 249 (2004).
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).
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).
Lucica Matei, & Ani I. Matei, The Social Enterprise and the Social Entrepreneurship – Instruments of Local Development – A Comparative Study for Romania, 62 Soc. & Behav. Sci.1066, available at http://ssrn.com/abstract=2130525.
Abstract (by authors): The authors examine the evolution of the social enterprise and the social entrepreneurship in Romania, as solutions of local development, as instruments of cooperation among citizens, organizations and the bodies of local, regional, national and European representation. The study takes into consideration the theoretical and normative framework in view to present the characteristics of the forms of organization of social economy, achieving a comparative study which uses comparative items: conceptual system, normative system, field of activity, integration on the labor market, etc. The development regions in Romania represent the sample for the comparative study. The comparative study is accomplished according to the methodology of similar studies from the field literature, highlighting the trends and development of social entrepreneurship and enterprise in the EU Member States.
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.
Dana Reiser Brakman, The Next Big Thing: Flexible Purpose Corporations, 2 Am. U. Bus. L. Rev. 55 (2012), available at http://ssrn.com/abstract=2166474.
Abstract (by author): Over the past few years, jurisdictions across the country have enacted specialized organizational forms to house social enterprises. Social enterprises are entities dedicated to a blended mission of earning profits for owners and promoting social good. They are neither typical businesses, concentrated on the bottom line of profit, nor traditional charities, geared toward achieving some mission of good for society. Their founders instead see value in blending both goals. They believe their social enterprises will be superior to traditional businesses by considering and internalizing the social costs they produce. They believe social enterprises more efficiently produce social goods than traditional charities by applying business methods to this important work. Yet, these social entrepreneurs worry traditional organizational forms designed for either businesses or charities will constrain their ability to achieve the gains they see in blended mission enterprises. Legislatures have obviously been convinced. Since 2008, lawmakers in nearly one-third of U.S. jurisdictions have enacted enabling legislation providing one or more specialized forms designed to house social enterprises. Thus far, these specialized forms have taken three distinct types, the latest of which is the subject of this Article: the flexible purpose corporation.
Felicia R. Resor, Benefit Corporation Legislation, 12 Wyo. L. Rev. 91 (2012).
Abstract (adapted from author): When the Maryland Governor signed into law the nation's first benefit corporation legislation, state Senator Jamie Raskin remarked, “This is a great moment in the evolution of commercial life in Maryland and America. We are giving companies a way to do good and do well at the same time. The benefit corporations will tie public and private purposes together.” A benefit corporation is one of a handful of new business entities designed to accommodate businesses that aim to benefit society in more ways than traditional corporations can through contributions to shareholders, consumers, employees, and general economic growth. In a growing number of states, lawmakers have passed legislation creating various new business entities to house social enterprise and organizations that blend for-profit and not-for-profit purposes. Benefit corporations are best understood within the broader context of corporate social responsibility (GSR) and its more recent offshoots, social enterprise and organizations with hybrid purposes. The creators of the new legal form, the benefit corporation, explain that hybrid organizations use “the power of business to solve social and environmental problems.” Social enterprise and businesses with hybrid purposes can have a primarily for-profit or a primarily not-for-profit purpose, yet with either combination the organizations will incorporate social and environmental responsibility into their policies. This comment begins with a short background to introduce the primarily binary organizational system and its limitations on corporate social responsibility. The background also introduces three hybrid legal forms now available in various states: the benefit corporation, the flexible purpose corporation, and the low profit limited liability company (L3C). Next, the analysis section demonstrates how benefit corporation legislation addresses three problems that organizations with hybrid purposes face as traditional for-profit corporate entities: (1) the shareholder wealth maximization norm; (2) the lack of accountability standards; and (3) the lack of transparency standards. The analysis argues that because of a benefit corporation's features that address these problems, it is a better form for social enterprise than a traditional corporation. The analysis then describes how benefit corporation legislation can create economic opportunity in Wyoming and is consistent with Wyoming public policy. In conclusion, this comment argues the Wyoming legislature should adopt benefit corporation legislation to create more legal clarity, accountability, transparency, and economic opportunity.
Brett A. Seifried, Mind the Gap: Using the History and Theory of Profit and Nonprofit Corporations to Remedy the Problems of Social Enterprise in Low-Profit Limited Liability Companies — A Theory and Practice Approach (2012), available at http://ssrn.com/abstract=2083827.
Abstract (by author): This Article is about social enterprise. It lays out what it is, its theoretical foundation, two major problems facing it, and recommendations for how to resolve those problems. The story and the diagnosis rely on history and extrapolation. It provides an introduction to the theory of the limited-liability form, the shape of its obligations, and how those obligations respond to progress and profit. Specifically, this Article argues that low-profit limited liability companies can be sustainable forms, if they import certain procedural and organizational lessons from profit and charitable corporations. These include broad fiduciary duties, accounting separation, disclosure to the states attorney general, derivative lawsuit procedures, and appropriate dissolution provisions. That progress and profit can and do helix together is a thread that runs throughout the Article. One major division separates Parts I and II from Part III, though. Parts I and II discuss and rebut two major criticisms of L3C’s. As such, they are broadly historical, while Part III is a practical application of those experiences to running and counseling a social enterprise. These broad visions may be read separately, but are better understood when digested together. As always, the theoretical informs the pragmatic and the pragmatic reforms the theoretical. Like the topic itself, this Article on social entrepreneurship weds two potentially conflicting frameworks into a meaningful whole.
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.
Dana Thompson, L3Cs: An Innovative Choice for Urban Entrepreneurs and Urban Revitalization, 2 Am. U. Bus. L. Rev. 115 (2012).
Abstract (adapted from author): Social enterprises offer fresh ways of addressing seemingly intractable social problems, such as high levels of unemployment and poverty in economically distressed urban areas in the United States. Though there is not a singularly accepted legal definition of social enterprises, they are popularly known as businesses that use for-profit business practices, principles, and discipline to accomplish socially beneficial goals. Social entrepreneurs, those who operate social enterprises, eschew a traditional notion of charity, which primarily relies on charitable donations to eliminate societal ills and instead employ market-oriented strategies to achieve social good. Social enterprises blur the lines among the nonprofit, for-profit, and government sectors, and given their innovative and distinct characteristics, require new legal entities to meet their needs. New legal entity forms, such as the low-profit limited liability company (L3C), the benefit corporation, and the flexible purpose corporation, were created in response to the needs of social entrepreneurs for new legal entities, other than traditional for-profit and nonprofit entities, that can attract the necessary funding for their ventures while also achieving their social missions. As with other social entrepreneurs, minority urban entrepreneurs determined to use their businesses to make a profit and provide positive social outcomes in economically distressed urban areas also need innovative legal entities to attract funding and fulfill their social missions. The L3C, though needing changes to enhance its effectiveness, holds promise for minority-owned small businesses in urban areas with socially beneficial goals that are in need of capital to establish and to operate their businesses. It is important to establish viable minority-owned social enterprises in urban areas because many urban areas in the United States face substantial challenges, such as high levels of poverty and unemployment. Social enterprises in these areas could play a role in revitalizing these financially troubled urban areas by providing jobs to residents and needed revenues, products, and services to these areas.
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.
John S. Wroldsen, The Social Network and the Crowdfund Act: Zuckerberg, Saverin, and Venture Capitalists' Dilution of the Crowd, 15 Vand. J. Ent. & Tech. L. 583 (2013).
Abstract (by author): By virtue of Title III of the JOBS Act, signed into law on April 5, 2012, crowdfunding could become a powerful, even revolutionary, force to finance start-up companies. It democratizes entrepreneurs' access to seed capital and converts the masses of Internet users into potential retail venture capitalists. Many have cautioned, though, that crowdfunding poses serious investment risks of start-up companies failing, committing fraud, and being mismanaged. Accordingly, the JOBS Act includes numerous disclosure obligations designed to mitigate such downside risks. But what has been overlooked, and what this Article analyzes from a venture capitalist perspective, is that even if a crowdfunded start-up company is successful, crowdfunding investors can lose the value of their investment if they lack venture capital legal protections. When successful start-up companies raise additional funds from professional venture capitalists, the value of ground-floor investments can be severely diluted, as colorfully dramatized in The Social Network. In addition, when crowdfunded companies are acquired in private transactions, crowdfunders are at risk of being left out. Therefore, under a “qualitative mandates” regulatory philosophy that moves beyond securities law's status-quo disclosure requirements, this Article proposes substantive venture capitalist protections for crowdfunding investors. For example, down-round anti-dilution protection, tag-along rights, and preemptive rights should help safeguard the value of early-stage crowdfunding investments in successful start-up companies. Especially because many crowdfunding investors are likely to be inexperienced and unsophisticated in start-up-company investing, crowdfunding laws and regulations should go beyond disclosure requirements that warn investors of danger (to the extent investors even read or understand the disclosures) to help crowdfunders obtain market-based economic protections characteristic of venture capitalist investment contracts.
Ohio University, Regional Nonprofit Alliance at the Voinovich School of Leadership and Public Affairs, Financial/Legal Issues
Social Enterprise Alliance – Where Mission Meets the Marketplace, at https://www.se-alliance.org/