+

Social Enterprise

Eric DavisManaging PartnerElliott & Davis, PChttp://www.elliott-davis.com

+So, What is a Social Enterprise?

“A mission-driven entity which applies market-based strategies to achieve a financial, social and/or environmental purpose, thereby building a more just, sustainable world. Their aim- to build value that is social and/or environmental as well as financial- is often referred to as the triple bottom line. Many commercial businesses would consider themselves to have social objectives, but social enterprises are distinctive in that their social or environmental purpose remains central to their operation.”

-Kyle Westaway www.socentlaw.com

+Social Enterprises vs.Nonprofits & For Profits Two traditional types of basic entities:

Nonprofit and For Profit.

Social Enterprises such as Benefit Corporations, Flexible Purpose Corporations and LC3s, are a blend of the two.

California, Hawaii, Maryland, New Jersey, Vermont, Virginia and New York have benefit corporation statutes.

Benefit Corporations, Flexible Purpose Corporations or LC3s DO NOT exist in Pennsylvania. Might become an option in Pennsylvania in 2013.

+

Why Should I Form a Social Enterprise?

Do something positive with your professional/working life.

Customers consider social and environmental impact when making purchasing decisions.

Novel enough to be really attractive to investors/capital.

+Social Enterprises in Pennsylvania

Seek B-Corp Certification (www.bcorporation.net)

Voluntary Certification, NOT Legal Structure

Can Be Applied to Any Legal Structure Differentiates Good Companies from

Companies with Good Marketing/PR Periodic Assessment/Must Publish

Results Need to Score Better than 80/200 on

B-Labs Assessment Require addition of language to

Bylaws/Operating Agreement No difference in Tax Treatment

+

What Entity is Right for Me?LLCs are best for Social Enterprises

• Most flexible• Least amount of filings. • No required shareholders’ meeting. • Pass through taxation treatment

+LLCs Formed for Social Enterprise:What’s Different?Needs:

General/Special Public Benefit“material positive impact on society and the environment, taken as a whole, assessed against a third party standard, from the business and operations of a benefit corporation” Third Party StandardDeveloped by a party not related to entity it’s measuring. Transparent in methodology. Reporting of Public Benefit

InformationIssue annual reports including records of successes and failures for general and specific public benefit (within 120 days after fiscal year + must be publicly available)

Formation Certificate of OrganizationMust state specific public benefit (like non-profit) Operating AgreementIncluding public benefit purpose, management duties and reporting of public benefit information. Certificates of MembershipShould include specific language

Management Manager(s)/Management committee

must take benefit in account on all decisions

Annual Assessment by third party Certificates of Membership Interests

Should Include Specific Language

Taxes No favored tax status.

(May change some day)

Raising Capital  No difference. Debt & Equity Financing

is OK Consider seeking Risk Capital from

groups looking to fund social benefit aspects

+Benefit Corporation:A New Class of Corporate Entity to Increase Transparency and Accountability.

Needs: General Public Benefit“material positive impact on society and the environment, taken as a whole, assessed against a third party standard, from the business and operations of a benefit corporation” Third Party StandardDeveloped by a party not related to entity it’s measuring. Transparent in methodology. Special Public Benefit

Providing individuals/communities with beneficial products and services.

Promoting economic opportunities for individuals or communities beyond job creation and making money.

Promoting health or environmental preservation

Promoting arts and sciences. Reporting of Public Benefit

InformationIssue annual reports including records of successes and failures for general and specific public benefit (within 120 days after fiscal year + must be publicly available)

Formation Articles of IncorporationMust state benefit corporation status and specific public benefit. (Similar to nonprofit) BylawsMust include public benefit purpose, management duties and reporting of public benefit information Stock Certificates/Shareholders

AgreementsShould include specific language

Management Directors must take benefit into account

on all decisions. Annual assessment by third party Some states require a benefit director (a

good idea in practice)

Taxes Subject to corporate tax on net income Dividends are subjected to personal

income tax No favored Tax Status (may change some

day)

+Flexible Purpose Corporation

New Class of CorporationAllows Corporation to Pursue a Special

PurposeProtects Directors from Shareholder Suit

+LC3

New class of LLC Elevates charitable purpose over profit Allows a mix of philanthropic and private capital

Designed Specifically to get Program Related Investment (PRI)

Exception for organizations that have a charitable purpose. Gets around rules governing private foundations

established by the Tax Reform Act of 1969. Very Expensive.

(requires legal opinions and extra attachments to tax forms.) Used infrequently and usually only for large gifts.

+Examples

Big Idea Cooperative, LLCThe Big Idea is a cooperatively owned and operated radical bookstore that provides literature that is multicultural, women-positive, queer-positive, class-conscious, anti-militaristic, and that promotes a sustainable world and community. The Big Idea also serves the community by providing a safe space for all individuals to explore radical and alternative ideas.

Sponsor Change, LLC SponsorChange.org provides non-profits with the means to recruit skilled college graduates to complete service projects and raise funds from sponsors to reward their work with student loan payments, helping both non-profits and college graduates reach their full potential.

+Thank You! Questions?

Contact Us!

Elliott & Davis, PC eric@elliott-davis.com

412.434.4991 ext 11

www.elliott-davis.com

www.incorporateinpa.com