Monday, May 29, 2017
Memorial Day Reflections: Choosing the Non-Profit Corporate Form for Organizations Helping the Families of Fallen Warriors
Wikipedia tells us what most (if not all) of us already knew: "Memorial Day is a federal holiday in the United States for remembering the people who died while serving in the country's armed forces." As I have often noted in conversations and communications with friends, regardless of one's views on the appropriateness of war in general or in specific circumstances, most of us understand the importance of honoring those who have lost their lives in serving their country. My dad, father-in-law, secretarial/administrative assistant, and many friends and students have served in the U.S. armed forces and survived the experience. Others have not been so lucky. I dedicate this post to all of them.
Last week, I had the pleasure of presenting at and attending a conference on Legal Issues in Social Entrepreneurship and Impact Investing—In the US and Beyond (also featuring co-blogger Anne Tucker). My presentation was part of a panel on securities crowdfunding as impact investing. But I attended many other presentations and participated in a lunch table talk on choosing the right entity for social enterprise and a brainstorming session on how legal education can better support social entrepreneurship and impact investing. The conference was fabulous, and I learned a lot by listening to the great folks invited by the organizers--including others on my panel.
As I reflected on the holiday today in light of last week's conference, my thoughts turned to organizations serving the families of fallen warriors and what types of formal entity structures they had chosen. These organizations are mission-driven and socially conscious. They exist, at least in part, to serve society. All of the ones I could think of or easily find in a Web search (among them Children of Fallen Patriots Foundation, That Others May Live Foundation, and Travis Manion Foundation--although I do not intend to endorse any specific organization) are organized as non-profit corporations under various state laws and qualified as exempt from federal income taxes under Section 501(c)(3) of the U.S. Internal Revenue Code. One might ask why.There are various simple answers (although the reality for the founders may be and have been quite different in any individual case).
- The organizations are principally or exclusively charitable or educational in nature.
- The organizations do not exist to serve both society and the environment (which is a general purpose requirement that benefit corporations must meet under most state statutes).
- The founders do not intend to make a profit for the private inurement of any individual or entity.
- The founders believe that their best source of funding is donations and that gifts will be incentivized by the federal income tax deduction available for donations to organizations qualified as tax-exempt under Section 501(c)(3) of the U.S. Internal Revenue Code.
- The founders do not foresee a need for equity investment.
- The entities through which these organizations operate were formed before social enterprise/mission-driven forms of entity (e.g., L3Cs, social purpose corporations, benefit corporations) were adopted by the states.
I am sure there are other simple reasons--and there certainly are more complex reasons--why these firms are not organized as for-profit ventures (whether traditional or social enterprise/mission driven). In short, the nature of the operations and funding prospects of these organizations dictated the form of entity chosen, given the available options for the firm at the time of organization. (These brief observations and this perfunctory analysis leave out, of course, an evaluation of the propriety of different types of for-profit or non-profit entities for these organizations, a topic which would require more information about the management and tax objectives of the firms at issue, all of which is beyond the scope of this post.)
It struck me that an exercise like this could be useful in the classroom, perhaps in a business associations or business planning course. As I continue to digest the take-aways from the conference last week, I have realized that this is a new type of choice-of-entity question that I can bring more powerfully to my students: reverse-engineering entity choice to tease out entity law attributes. It seems my Advanced Business Associations course is a good place for me to do this, and starting in January, I will have an extra credit hour to use to better engage my students with these kinds of questions. Some of the students in that course do not enroll in our business clinic, in which they would likely face choice-of-entity issues with actual clients. For students who do not avail themselves of a business clinic offering, a simulation-like problem can be useful as a second-best (and more controlled, with the attendant benefits and detriments) educational experience.
If any of you are already using this type of problem in class, I would appreciate you letting me know by offering a comment here or sending me an email message. In the mean time, I hope that this post is (at the very least) a reminder of the importance of this holiday in our calendar. Yes, as Wikipedia also notes, Memorial Day is the traditional beginning of summer (and since my grades are in, that;s real for me). But it is much, much more . . . .