Over the last few months, two new developments have arisen regarding social enterprise legal forms. First, Delaware has passed new legislation enabling organizations to incorporate as a Benefit Corporation – what some have called “historic Benefit Corporation legislation.” Second, U.S. Congressman David Cicilline (Democrat of Rhode Island) has proposed the Social Enterprise Ecosystem and Economic Development (SEEED) Act, which would establish the SEEED Act Commission “to examine and make recommendations on ways the federal government can support and utilize social enterprises.” I would argue that the first development is not particularly exciting or historic, and certainly not a “seismic shift.” The second – the SEEED Act – could be huge.
Benefit Corporation – Not All It’s Cracked Up to Be
While many laud the Benefit Corporation and its social enterprise cousins – the L3C and Flexible Purpose Corporation, I have never been a big fan of them. If you’ve read our blog post analyzing the different options for incorporating a social enterprise or our follow-up on social enterprise legal forms, you know that while we believe they are beneficial for some organizations, we don’t find them to be particularly useful in general for one main reason: they are all for-profit legal forms that don’t have any tax benefits.
There are only two (somewhat) real advantages to social enterprise legal forms:
- They help you avoid mission creep by adding extra burdens on the company to ensure the company doesn’t lose focus and one day turn away from its social goals.
- They – perhaps – help you get funding from social-impact-oriented investors, but those are few and far between.
You can accomplish the first goal via self-restraint or by setting up an LLC, thus avoiding the additional burdens that come with the Benefit Corporation, L3C, and Flexible Purpose Corporation. If you can control yourself and your organization by making sure you don’t lose your social-impact focus, you don’t need a social enterprise legal form and the associated burdens.
Or, if you set up an LLC and create internal requirements in your operating agreement, you can avoid the onerous external requirements imposed on social enterprise legal forms that will likely make your business less efficient. Plus, you likely will still be able to find socially conscious investors if they think your business will truly have impact and your operating agreement reflects that commitment. In short, new Benefit Corporation legislation in Delaware doesn’t strike me as anything special or provide any real benefit for most social enterprises.
SEEED Act – A Potential Revolution for Social Enterprises
On the other hand, the SEEED Act, proposed by U.S. Congressman David Cicilline of Rhode Island, could be a game-changer. If it is passed and the SEEED Act Commission delves deeply into the issues facing social enterprises, particularly not-for-profit social enterprises, something wonderful could come out of the SEEED Act Commission’s work. It could upend the current state of social enterprises.
Many social enterprises that are focused on impact and not on enriching investors or founders currently face an either-or situation:
- become a non-profit 501(c)(3), which severely restricts organizations’ ability to earn a profit, even if the profit is simply for fundraising purposes, i.e., to create even more impact and not to enrich any individuals; or
- become a for-profit legal entity that has to worry about investors, profits, and taxes.
There should be a middle ground, but none of the existing social enterprise legal forms provide that middle ground. The problem mainly lies with the U.S. Congress and the U.S. tax code, which is why the SEEED Act Commission, if it truly looks into the problems that not-for-profit social enterprises face, could bring about a really powerful solution.
And we’ve proposed that solution for a hybrid legal form: it’s the Not-for-Profit Social Enterprise. As we outlined in our previous blog post, the Not-for-Profit Social Enterprise would have 3 key requirements:
- Low corporate tax rate.
- Ownership by the public, not by private shareholders.
- Restricted employee compensation.
With those requirements in place, the Not-for-Profit Social Enterprise would be accountable for, and flexible enough to accomplish, its socially-minded goals. We implore the SEEED Act Commission (if it comes about) to consider our proposed new social enterprise legal form and the new tax laws that would need to be written to make it happen. If the SEEED Act Commission recommends, and Congress passes, the necessary changes to the tax code, we believe that states would jump on the opportunity to create these new legal forms so that not-for-profit social enterprises could operate as businesses that don’t enrich shareholders but instead focus on creating social good.
We know that our views on the Benefit Corporation and other existing social enterprise legal forms are controversial, and many disagree about the benefits of these legal forms. But, we believe that there is a huge gap in this space – and the Not-for-Profit Social Enterprise could fill it.
So, we would say to Congressman Cicilline: please get the SEEED Act passed, work with the SEEED Act Commission to explore the idea of a not-for-profit social enterprise, and convince Congress to pass the necessary tax code changes to make it happen!
These issues are important to the future of our society – how we handle the social challenges of today and tomorrow – and we’d love to hear your thoughts on them. Please comment below.