Wednesday, May 24, 2017

Should social entrepreneurs form nonprofits or benefit corporations?

On June 8, I will answer this and other questions during an interactive session for a group of social entrepreneurs at Venture Cafe in Miami. Fortunately, I will have an accountant with me to talk through some of the tax issues. I was invited by the director of Radical Partners, a social impact accelerator. We estimate that 75% of the audience members will work for a nonprofit and the rest will work in traditional for profit entities with a social mission.

Many entrepreneurs in South Florida have an interest in benefit corporations, but don't really know much about them. Our job is to provide some guidance on entity selection and demystify these relatively new entities. Some of the issues I plan to address in my 20 minutes are:

1) the differences between nonprofits, for profits, and benefit corporations

2) the differences between benefit and social purpose corporations (focusing on Florida law)

3) the biggest myths about benefit corporations (such as perceived tax benefits)

4) tax issues (for the accountant)

5) director duties

6) funding- changing funding model from donors to investors; going public

7) reporting, auditing, and certification requirements

8) benefit enforcement proceedings

9) the role of B Lab and the difference between a B Corp and a benefit corporation (currently 15 Florida companies are certified through B Lab)

10) transparency and accountability issues

We plan to leave about 45 minutes for questions. Not many lawyers in Florida have experience with benefit or social purpose corporations, so I am seeking guidance from our readers. If you are a practitioner and have dealt with these entities in your states, I'm interested in your thoughts. Are a lot of your clients asking about these entities? Have they converted? How do you help them decide whether this change is good for them? I'm also fortunate to have colleagues on this blog who are real thought leaders in the area, and am looking forward to their comments. Personally, I believe that for many business owners, benefit corporations may provide a perceived marketing edge, but not much more, Author Tina Ho has raised concerns about greenwashing. If I'm wrong, let me know below or send me an email at mweldon@law.miami.edu.

 

https://lawprofessors.typepad.com/business_law/2017/05/should-social-entrepreneurs-form-nonprofits-or-benefit-corporations.html

Corporate Personality, Corporations, CSR, Entrepreneurship, Marcia Narine Weldon, Nonprofits, Social Enterprise | Permalink

Comments

My practice is focused in the areas of small business and startups. I acquired a LL.M in Tax. Prior to having my law license, my work activity was entirely focused on building a small manufacturing business. Tennessee has recently enacted benefit corporation legislation.

Although the start-up entrepreneurs I have worked with as legal counsel over the past 20 years may possess altruistic tendencies and use their “once accumulated” largess for social benefit, I’ve not worked with anyone during formation - who is mortgaging their home, committing the bulk of their resources and (whether they know if or not) more time than they ever dreamed - willing to enshrine a commitment in the formation documents to other than return on investment.

Because in Tennessee any social commitment may be memorialized in the corporate charter or by-laws (although I’ve not ever formed an entity containing such a provision) of a for-profit entity, I concur that using these specialized entities may have some attraction for a limited segment of consumers and be viewed as marketing tool. Simply stated, I’ve had successful entrepreneurs create non-profit/charities to further some social concern; but, I’ve never been associated with a start-up (as an entrepreneur or during legal practice) whose overwhelming interest wasn’t return on investment. Conversely, people who have accumulated some largess (ex., Newman’s Own), may find these benefit corporations a tool to lend their assets while walling off any appearance of personal benefit.

Posted by: Tom N | May 25, 2017 9:58:25 AM

That’s a lot to address in 20 minutes! The list is a great one, however. Good for you for pulling all this together.

At the conference last week on "Legal Issues in Social Entrepreneurship and Impact Investing—In the US and Beyond" that fellow co-blogger Anne Tucker and I presented at and attended (about which I will say more tomorrow), I participated in a "lunch table talk” on this topic. To add nuance to your list (or just for responses in any follow-on Q&A), you may want to think about whether the protection that the board has under benefit corporation statutes is as powerful as it may seem. On the one hand, there is no clear, sure ability to enforce the corporation’s charter-based purpose or the board’s duties to consider or balance (depending on the statute) the various stakeholder interests that may be at issue, perhaps excepting decision-making that manifests clear conflicting interests. On the other hand, (1) both the requirement of a specified type of corporate purpose (in most states, requiring a general purpose to benefit both society and the environment) and director and officer fiduciary and other duties under the statutes and applicable decisional law do exist, and (2) a good litigator is bound to find ways through statutory prohibitions against enforcement actions if members of management act in contravention of the corporation’s expressed statutory purpose or their fiduciary duties, even if it means bringing a cause of action outside the purview of corporate law. Particularly contentious may be M&A proposals/transactions and interactions with fund investors. In any event, these statutes for new social enterprise/mission-driven forms are untested in the courts, and the cost of uncertainty is difficult to assess for some firms.

A participant in the table talk allowed as how he has formed non-profit, for-profit, and benefit corporations for social enterprise and that most of the clients he has served wanted to form benefit corporations more for signaling/marketing purposes than anything else. This troubles me. I think it’s the wrong reason to form a benefit corporation, with the attendant responsibilities and additional costs of reporting/disclosure. My knowledge that many of the initial benefit corporations formed in Tennessee were formed erroneously and that compliance with reporting responsibilities has been less than exemplary just adds to my concern.

Anyway, I hope this is somewhat helpful. Feel free to ask for more . . . .

Posted by: joanheminway | May 28, 2017 12:15:57 PM

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