REBLOG: Choosing a Legal Structure for Your Social Enterprise

GatherwellCourtesy of Cynthia Jaggi’s (’00) Gatherwell, check out this guest post by Illinois-based attorney Karyn Osinowo:

This article presents a general overview of entity choices available for social enterprises looking to form an entity.  While it uses the law of Illinois as a guide, the big questions are consistent wherever you are.  Be sure to consult an attorney in your state for the most up-to-date and accurate information.

It is easy to get overwhelmed by legal and financial issues when starting a social enterprise.  With the help of skilled professionals, these issues can be managed.  The vision you have for your social enterprise should be at the forefront.  In order properly decide upon the entity that allows you to realize your social mission over the long term, you should ask yourself the several questions at the outset.

Initial Questions Every Social Entrepreneur Needs to Ask

The choice of legal structure involves a number of practical considerations.  Early in the planning stages of the venture, social entrepreneurs should consider the following questions in advance of meeting with an attorney to put the legal structure in place:

  1. Who are the founders and what is their expectation in terms of ownership of the organization?

  2. What is your social purpose (what problem are you trying to solve)?

  3. What social impact do you want to achieve and how will you measure it?

  4. What is your business plan and how will it address the problem you are trying solve?

  5. Will you rely on grants and donations or other subsidies for regular operations?

  6. Is it important for your public image to be a particular type of entity (nonprofit, co-op, benefit corporation, etc.)

  7. Where will you get your startup and ongoing funding?

  8. Who are your investors/shareholders?

  9. Who are your beneficiaries/customers/stakeholders?

  10. Who will control and manage the organization?

  11. What are your personal and financial goals in starting this organization?

  12. How long do you intend the organization to exist and what is your exit strategy (for yourself and for investors)?

Choice of Legal Structure

It can be challenging to meet the legal structure needs of the social entrepreneur.  The typical social entrepreneur wants (and needs) the tax and capital-raising advantages of both the for-profit and nonprofit worlds.  Both for-profit enterprises and nonprofit organizations have their respective constraints when it comes to being able to access capital and private investment.  The best legal vehicle for a social entrepreneur is one that not only allows private ownership and investment but can also receive program-related investments and charitable contributions.  Even with LLCs and L3Cs, which are quite flexible in terms of tax treatment and management structure, it is difficult to find within one entity the best attributes of both for-profit and nonprofit organizations.  It is possible, although not completely without risk, to create a hybrid structure – one that employs a combination of business entities acting in concert to achieve the dual goals of profit and positive social impact.

To help you think about the spectrum of legal structures from which you may choose, I have categorized them from “Worst” to “Best”, with the latter designation essentially meaning those one-entity legal structures which are ideally suited for social enterprises in that they offer the most flexibility in terms of being attractive to investors while pursuing the goal of social impact.  As always, consult an attorney to determine the best course of action for you given your unique circumstances and goals.

 To read the full article, please click here.

Jelisa Adair

I am the Civic Engagement Fellow for 2013-2014. While a student at Wesleyan I double majored in Psychology and Feminist, Gender, and Sexuality Studies and completed a joint thesis during my senior year. I am interested in issues of social justice, mental health, media, and global welfare.