The credit crunch has hit me hard. I haven’t lost my job (so far), but my income has decreased significantly (about 25%), the threat of redundancy has loomed over me for the whole of 2009 and is likely to be an issue again in 2010. During this time of difficulties I’ve had to tighten my belt, to cut costs, I’ve had to crunch my own credit, look at my needs and expenses and try to put together a back-up fund for emergencies.

It has been hard. The credit crunch was unexpected by most people, including me, and because there was no warning I found myself unprepared.

To give you some background, I have a full-time job (the joy!), I live in rented accommodation (which until recently I enjoyed alone). I enjoy good food, regular holidays, lots of tv channels, unrestricted broadband internet access, buying things when I want them, not having to save forever to get an iPod touch, and being in control of my money.

That is until I realised how precariously balanced I was on the financial divide. The divide between the haves and have-nots. Because of the credit-crisis it’s not so much of a divide any more, and there’s no border patrol stopping you going over to the other side now.

I plan to put together a series of articles aimed at making you look at your money and getting you to think about how you spend it. This isn’t a get rich quick scheme, it’s not a 12-step debt removal system, it’s just a common-sense way of looking at money and how you use it. The idea is to take in this information and use it to save yourself some money without having to go without too much.

Next time: Budgeting

Introduction to the L3C

For more information or to seek assistance in setting up a social venture or a new L3C, please contact Mr. Dinning at (757) 232-2619.  Thank you.

The financial position of private sector, final salary pension schemes improved in November, figures show…. From BBC News. Full story

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Structuring Social Ventures: The L3C as a Non-Traditional Business Entity

By: B. Ray Dinning, JD, LLM (taxation)

December 7, 2009

The conundrum facing most social entrepreneurs is choosing between several imperfect options when it comes to structuring most social ventures as these ventures typically contain both for-profit and nonprofit elements and there is generally no single “all purpose” entity which completely addresses the myriad of issues in structuring a social venture. However, government, academia and the private sector are responding to this void in enacting new legislation and create new entities to address the needs of social entrepreneurs. The first of these new entities is the L3C or low income limited liability company.

Legislative History:

First enacted by Vermont (April 30, 2008), the L3C is rapidly gaining momentum as a social venture entity (my office is receiving calls on a weekly basis from people interested in setting up L3Cs). In 2009, several states have followed Vermont’s lead including: Michigan (January 15, 2009), Wyoming (February 26, 2009), Utah (March 23, 2009), Maine (effective September 12, 2009) and Illinois (signed August 4, 2009 and effective January 1, 2010) as well as the Crow Indian Nation and the Oglala Sioux Tribe. Reportedly, L3C legislation is pending in Georgia, Missouri, Montana, North Carolina, North Dakota, Oregon, Tennessee and Washington.

The L3C Generally: 

The L3C is a form of limited liability company (LLC) which possesses many of the same entity characteristics a typical LLC. For example, like a traditional LLC, the L3C is a for-profit business entity. Like a traditional LLC, the L3C offers a flexible ownership and management structure, whereby each member’s management responsibility, ownership interest, financial and tax interests may vary according to individual needs of the social entrepreneur or social venture. Like a traditional LLC, the L3C’s members enjoy limited liability for the actions and debts of the company. Finally, like a traditional LLC, the L3C is generally classified as a “pass-through entity” for federal tax purposes.

In fact, the L3C legislative structure is virtually identical to that of the traditional LLC. Vermont provides that “Organizing the L3C is the same as the regular LLC except that the L3C designation must be indicated when the articles of organization are filed and the name must include the words “L3C”.” See Vermont Secretary of State: Corporations Division.

However, there is one important distinction between the L3C and the LLC. Although both are profit-making entities, the primary purpose of the L3C is not to earn a profit, but to achieve a socially beneficial objective, with profit as a secondary goal. Whereas a traditional LLC may be organized and operated for any lawful business purpose, the L3C must be organized and operated at all times to satisfy the following requirements:

 • The company must “significantly further the accomplishment of one or more charitable or educational purposes,” and would not have been formed but for its relationship to the accomplishment of such purpose(s). (For example, Vermont requires that the L3C must satisfy “one or more charitable or educational purposes within the meaning of Section 170(c)(2)(B) of the Internal Revenue Code of 1986”).

• “No significant purpose of the company is the production of income or the appreciation of property” (though the company is permitted to earn a profit). (Vermont adds that “the fact that a person produces significant income or capital appreciation shall not, in the absence of other factors, be conclusive evidence of a significant purpose involving the production of income or the appreciation of property”).

 • The company must not be organized “to accomplish any political or legislative purposes.”

Finally, if the L3C ceases to satisfy any one of these requirements after its formation, it shall cease to be a L3C but shall continue to be a traditional limited liability company under state law.

L3C Requirements Intended to Assist Private Foundations in Funding L3Cs:

These three requirements, which must be specifically contained in the organizational documents of an L3C, are designed to mirror the requirements in the Internal Revenue Code governing the Program-Related Investments legislation for Private Foundations. Thus, the L3C was created and structured to meet the IRS requirements for Private Foundations and to set forth rules which would allow the L3C to qualify as a recipient of Program-Related Investment (hereinafter referred to as a “PRI”).

PRIs are allowable investments made by private foundations (such as the Bill Gates Foundation), usually into for-profit business ventures, to support a charitable project or activity. PRIs may involve significant risk, low return, or both, but these investments are made by foundations (despite the risks) because the PRIs are intended to achieve charitable purposes—and, as a result, receive special treatment under the federal tax law. Federal tax law generally requires private foundations to distribute at least five percent of their assets to social programs every year – or by making socially beneficial “program-related investments” of five percent or more of their assets every year in order to receive their tax benefits.

Prior to the L3C legislation, few private foundations chose to make PRIs, usually because of the difficulty, uncertainty  and expense of ensuring that a proposed investment will qualify as a PRI.  While the IRS has not ruled on whether investments to L3C’s will qualify as PRIs and has further warned that foundations may not rely on L3C status in determining whether or not an investment qualifies as a PRI, that guidance from the IRS will likely come in 2010.  Until such time, a private letter ruling is still required to “guarantee” that an investment by a private foundation in an L3C will qualify as a PRI.

New Financing Options with the L3C:

As a new, non-traditional business entity with both nonprofit and for-profit characteristics, the L3C can access the PRIs of private foundations to access billions of dollars of market-driven capital for social ventures designed to generate a social return on investment as well as a potential for a financial return on investment.  Because the L3C allows for a flexible ownership structure and it can have different classes of investors which may include: individuals, nonprofits, for-profits, and even governmental agencies, the L3C is the perfect vehicle for a social venture with both nonprofit and for-profit partners.

Because each of these “partners” in the L3C have different investment goals (social goals, financial goals and even public relations goals with various financial return requirements), then each of these partners in a social venture will likely be willing to assume different levels of financial risk. This is vitally important in the structure of the financing of a social venture – particularly when significant capital is needed in the project.

For example, in a recent Poverty Alleviation and Educational Social Venture that I structured in the hotel and tourism industry, three differing levels (or  tranches) of investment were involved in the social venture.  Thus, the L3C had three levels of investors to fund and finance the social venture. 

The first level (named the junior tier or equity tranche) is the capital that is the most at risk in the social venture.  Because the private foundation serves a social purpose with its PRI, this risky capital was provided by the private foundation in the form of PRI. Under this structure, the private foundation in the L3C has the least seniority or last claim on the assets of the social venture upon dissolution or termination and, based on the PRI discussion above, are willing to accept a lower rate of return on their investment. By allowing private foundations to absorb greater risk and receive lower returns, the first level or junior tier of investment from the private foundation provides the foundational capital of the L3C, strengthening its balance sheet and positioning it to attract additional capital from non-charitable individuals or financial investors.

In second level (intermediate tier or mezzanine tranche) of financing for the L3C social venture is designed for profit-seeking investors. This second level, mezzanine tranche was designed to attract socially-conscious individual investors whose were interested in “doing good and making money” and who were willing to forego market-rate financial returns and instead accept part of their return in the form of a social welfare return on investment (which has been referred to as the SROI or social return on investment).

The third level or senior tranche of capital in the tourism social venture was provided by investors that need to generate market rates of return and, as an ancillary benefit, are happy to invest in a project that meets a social need. With the PRI capital and the mezzanine tranche in place, the L3C was able to offer an attractive, market rate of return with a lower level of risk to institutional investors (e.g., banks, pension funds, investment banks and other traditional investors. Thus, the L3C’s investment structure was able to generate  substantial new funds to meet the financing needs of this tourism social venture.

General Tax Structure:

While L3Cs are specifically created under state law to further charitable purposes, L3Cs are not tax exempt charitable organizations. Thus, L3Cs are not exempt from paying federal and state taxes and investments in L3Cs are not tax-deductible. L3Cs, like traditional LLCs, are pass-through entities similar to partnerships. So, no federal or state income tax is payable by the L3C itself. Instead, all items of income, loss, deduction and expense are “passed through” the L3C to its individual members who are allocated these tax items in proportion to the members, and are reported on the members’ individual tax returns.

So, while L3Cs are intended to promote and further charitable purposes, the profits generated by the L3C are subject to taxation at the member level on the members individual tax returns. Tax-exempt nonprofits, however, will generally be able to receive profits from an L3C on a tax-free basis as long as the income is related to the charitable purposes of the nonprofit and the profits are used to further charitable purposes.

L3C Advantages in Structuring Social Ventures:

At the end of the day, the L3C is here to stay. While it may take state government, the IRS, private foundations, investors, social entrepreneurs and social ventures time to adjust to and adapt the L3C to its highest and best use, it is still an excellent step forward for structuring social ventures. To summarize, the basic advantages to using the L3C include (but are not limited to):

• The L3C is a defined for-profit entity organized under state laws which is established specifically to promote social ventures and to assist social entrepreneurs in providing a SROI or social return on investment;

• The L3C provides an excellent social joint venture entity for use in projects where there will be for-profit, nonprofit, individual, institutional and government partners where free market principles can apply unburdened by nonprofit governmental and IRS tax exempt organization regulations;

• The L3Cs financial structure allows for the flexible and tiered financing by promoting the creation of a salable product by the structured financial market of banks, investment banks and others;

• The L3C provides an investment vehicle for the PRIs of private foundations where the private foundations may buy ownership shares, make loans to, or otherwise financially invest with the L3C;

• The L3C is easy to set up, easy and flexible to operate and the set-up cost is minimized in comparison to other structural choices for entities and joint ventures;

• If the investment by the private foundation qualifies as a PRI then all or part of that investment will count towards the private foundation’s minimum payout requirement; and

 • Finally, the L3C has a flexible structure to promote the investment of private financing and capital to further a social purpose. Through the tiered financing approached discussed herein, the financial horizon of social ventures has been increased significantly.

Conclusion:

In conclusion, to a large extent, the field of social enterprise is still in its infancy. While social ventures and social entrepreneurship is growing rapidly, the economic success of this new sector on a significant scale is dependent on innovative, non-traditional legal structures which allow many parties to participate in social ventures. Furthermore, by allowing new, flexible financing structures, the L3C opens up financial markets to private foundations and investors who seek to align their own social values with their investment strategy, and who see social ventures as a means to this end. The legal structure of any social entrepreneur should therefore be driven by the financial and capital structure and business model it intends to pursue for its social venture, rather than some abstract notion of how a social enterprise “should” be structured. And, while there is in fact no single, correct way to structure a social venture from a legal point of view, the L3C is a formidable, potential tool to structuring social ventures. Of course, the market will ultimately determine if the L3C “works” best for them or not. At this early stage, only time will tell.

B Ray Dinning is a US attorney specializing in tax, mergers & acquisitions, social ventures, nonprofit joint ventures and corporate law.  Mr. Dinning assisted Professor Michael I. Sanders with the research and drafting of the authoritative legal text in this area called “Joint Ventures Involving Tax Exempt Organizations” by John Wiley & Sons in 1994 with later editions. To contact Mr. Dinning with comments or questions, please call (757) 232-2619.

4th Round of the Youth Sector Development Fund Launched 

Schools Minister Iain Wright has invited third sector organisations to bid for a share of up to £10m to raise the aspirations of young people from disadvantaged backgrounds.

The fourth round of the Youth Sector Development Fund (YSDF) will focus on supporting the aims of the Government’s Information, Advice and Guidance (IAG) Strategy published last month.

Bids should demonstrate how young people would be imaginatively shown the full range of options open to them in education and work, such as through “taster sessions” at universities or real experience of different careers.

Around 25 third-sector organisations are expected to benefit from the fund, through a mixture of grants and business support, from April 2010 to March 2011.

He said:“Many organisations in the third sector are already working with disadvantaged young people and parents in innovative ways that challenge negative stereotypes and raise aspirations.

“Today I am inviting these organisations to build on that experience and to develop exciting new approaches so that young people and parents get the impartial information, advice and guidance about learning and work opportunities that they need, including experiencing those routes at first hand.

“In particular I want to see proposals which will help young people and their families with low aspirations and capture their imagination through exciting forms of work experience, ‘tasters’ and work-related learning, and increase support through mentoring.”

Further information and an application pack for the 4^th Round can be found at http://ysdf.ecotec.com/eoi/yr4application.aspx

The full press release can be found at http://ysdf.ecotec.com/index.asp?pID=13

If you feel that this round is not suitable for you, but you know an organisation that would benefit from this fund, please forward this email.
Pre-application workshops to give further information on the programme and guidance on completing the application form will be held as follows:

London: 15^th December 2009

Leeds: 16^th December 2009

Attendance at one of the workshops is strongly recommended. One place per organisation is available. To book yours, please email ysdf@ecotec.com, stating clearly which of the above sessions you wish to attend and any special access requirements you may have. Presentations and any clarifications raised will be posted on the programme website: http://ysdf.ecotec.com.

Just as Bank of America (BAC) has decided to pay back $45 billion in TARP (Troubled Asset Relief Program) money, and the employment picture brightened with the recent improvement in the unemployment rate, our banking piggy bank, FDIC (Federal Deposit Insurance Corporation), has been busted. Recovering macroeconomic indicators haven’t allowed our banking system to get out of the woods quite yet. This struggling FDIC news comes even before the inexorable collapse expected in commercial real estate (see Wilbur Ross’ comments on the subject).

Sheila Bair, the Chairwoman of the FDIC, indicated with her sobering remarks that these trends will not disappear overnight:

“For now the credit adversity we have been discussing for some time remains with us, and we have been discussing for some time remains with us, and we expect that it will be at least a couple of more quarters before we see a meaningful improvement in that trend.”

With the FDIC adding 136 banks to its “problem list” in the third quarter (bringing the total to 552), the regulator was forced to pull out $38.9 billion from the piggy bank, officially draining the rainy day fund into the red.

Fixing the Problem

How will the FDIC replenish its hollow piggy bank? Ms. Bair has recently endorsed a letter sent to House Financial Services Committee Chairman (Barney Frank) that would force secured creditors (mainly banks) to create a slush fund for potential large bank failures that pose a threat to the system. Ms. Bair designed the program this way because all banks – big or small – would be forced to “evaluate the solvency of our largest financial firms.”

Due to the continuation of bank failures and loan loss deterioration, the FDIC fund balance slipped to a negative  -$8.2 billion (the first time since dealing with the failing thrifts in 1992) for the September period. Therefore, Ms. Bair put forth an emergency measure that requires insured banks to prepay three years of insurance premiums by the end of 2009. This action is expected to raise approximately $45 billion in funds. Although the reserve piggy bank had an upside down balance, the FDIC can still keep the lights on and cover employee payroll because the regulatory entity still has $23.3 billion in cash and marketable securities on its balance sheet.

With the taxpayers flipping the bill for bailouts galore over the last two years, and Goldman Sachs (GS) wheelbarrowing out bonuses to their employees, Ms. Bair and politicians are looking to the industry to now shoulder more of the bank failure burden. Let’s hope the piggybank can be replenished so taxpayers don’t have to go scraping through their wallets again.

Wade W. Slome, CFA, CFP®

Plan. Invest. Prosper. 

DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients own certain exchange traded funds (VFH) and BAC, but at time of publishing had no direct positions in GS. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC “Contact” page.

The UK electricity regulator, Ofgem, says average electricity bills can increase by 4.30 a year to pay for network upgrades…. From BBC News. Full story

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Social Ventures Law and the Maasai Tribe - Adventures from Africa

  Spending Time with the Maasai Tribe was Amazing

 Based upon the response from “Cows on the Beach”, I thought that another story about Structuring Social Ventures in Africa would be appreciated.  This story is about “Spending time with the Maasai”.

In the Summer of 2007, my wife and I were asked to assist a University with the structure of a social venture to promote college education among the Maasai Tribe of Kenya and Tanzania.  The Maasai Tribe then asked us to assist them with the structuring of a tourism social enterprise.  Since this was a grassroots, community-based social venture and I would never pass-up a trip to spend time with the Maasai People, my wife and I made the trek to Kenya and Tanzania.

 Our Community Meetings (shown above) were on a mountaintop overlooking the Masai Mara National park in Kenya.   The Wildebeest Migration was coming to an end but we witnessed hundreds of thousands of wildebeest, zebra, buffalo, giraffe and gazelle followed by lions, hyena, cheetah and other predators.  Of course, the views and the experience were amazing.

 One story of note, Maasai Warriors are required to kill a lion on their own armed only with a traditional spear at age 16 to become a true Maasai Warrior.  While showing a film that was created for the Maasai about the tourism social venture – we noticed that these people had never seen a movie before in their lives.  The film was short but showed the typical indigenous safari viewing lodges, wildlife and scenery as an introduction to the tourism social venture.  In one scene, there was a large picture of a beautiful lion lying in the bush.  At the sight of the lion, one overly aggressive young warrior stood up and promptly threw his spear at the lion and through the movie screen.  Have to say, that was one reaction that no one anticipated.  Of course, after he saw the effects of the spear, he relaxed and everyone else went back to watching the movie.  I have to say, spending time with the Maasai was one of the highlights of my life and certainly my career as a tax lawyer.

 When structuring social ventures (especially when dealing with grassroots meetings with indigenous people) in Africa, it is important to understand the culture and mannerisms and social customs of the people you are working with.  I always advise clients to “learn from the local people” and to “listen alot and speak less.”  We have to be cognizant of the reality that we are trying to help these people but we are not supposed to westernize them.  I hope that the social ventures that I have assisted with have supported the local people without changing them.  Africa has amazing cultural heritage that should be preserved for as long as we can.

 These two social ventures are on-going and the structures are simple in design but complex in operation and in real life experience.  Real life experience can teach you more about social ventures and social entrepreneurship than an textbook or individual ever can.

 Thanks for your support.  Please contact me at Ray Dinning (757_ 232-2619.

In June, 2009, I was asked to assist in the structure of a tourism social venture in South Africa which will primarily benefit the Xhosa Tribe along the Indian Ocean coastline.  This was a tremendously beautiful day on a pristine stretch of beach and it was the beginning of the Greatest Migration on Earth – the Great Sardine Run had begun.  So, with up to 60 kilometers of sardines schooling along the coastline, dolphins, whales, sharks, diving gannets and abundant bird life and marine life could be seen with the naked eye (we saw 30 whales breaching).

On this day, we were walking along the beach and talking with the local community about their needs and desires for this project.  The Xhosa People along the coast live in relative harmony with abundant fruit, vegetables and seafood with great weather (always about 80 degrees F or 25 degrees C).  However, there is a great need for jobs and a future for their children.  A small tourism lodge will promote job creation, teach valuable skills and feed up to 12 families (12 jobs X 5 family members per family = 60 people).  Furthermore, profits are set aside for micro enterprise loans and job creation projects that feed off of the tourism project. 

So, in a grassroots meeting we kept being interrupted by 20 cows walking down the beach with us.  If you haven’t ever seen cows on the beach, it is truly an unnatural site.  We finally chased the cows back into their grazing lands and continued on with our grassroots Board of Directors meeting.

 At the end of the day, we meet with the Tribal Leaders of the area surrounding the project.  Here, we are meeting with the Chief and the Community Trust Members of this Xhosa Community.  After a successful meeting, we ended up structuring the project using an LLC-type entity in South Africa which is owned by the developers, an NGO, the local community and the social investors.  Profits are set aside to promote education, job training and micro finance loans with the ultimate goal of creating a self-sustaining, profitable tourism social venture for the Xhosa People in South Africa.

 Thanks to all.  Ray Dinning JD, LLM.  For more info or to get involved, call (757) 232-2619.

Structuring Social Ventures:  Choice of Legal Structure

By:  Ray Dinning, JD, LLM (taxation)

December 2, 2009

Using Traditional For-Profit Entities as the Structural Vehicle for Social Ventures:

The more generally accepted method for structuring Social Ventures is through the use of traditional for-profit entities such as the limited liability company (“LLC”), the limited partnership, the general partnership and the for-profit corporation.  New, non-traditional, hybrid  structures such as the “B Corporation” and the L3C or “low income limited liability company, which share for-profit and non-profit characteristics, are rising to the forefront of social venture structural vehicles (Non-traditional for-profit entities will be addressed in Part V of this Series).

Structuring social ventures through the use of a for-profit entity as the vehicle for social enterprise, either alone or in combination with nonprofit or charitable organizations, generally avoids all of the restrictions of using a charitable organization for for-profit ventures.  This structure works very well for charitable, tax-exempt organizations that desire to carry out social ventures because the social venture, business-like activity is conducted through an affiliated or subsidiary entity such as an LLC.  Furthermore, the charitable organization can also conduct its charitable purpose activity in the project as well.

For example, a US public charity and a South African public charity partner together to manage a large tract of pristine, oceanfront land (2,000 acres) on the coastline of South Africa for conservation purposes.  Obviously, conservation of important biodiversity marine and wildlife coastal habitat serves a charitable purpose under US tax law.  In working with the local indigenous population, the charities are confronted with the need for job creation in the local community.  In creating a strategy for job creation, the charities learn that the community has a tract of land adjacent to the 2,000 acres of conservation land where 11 acres of land were set aside for a small, boutique tourism development to create jobs and needed revenue.  However, the community has no perceived partners or resources.  The community requests that the charities intervene and assist them with the tourism development.  In this situation, a South African entity, similar to an LLC, is used as the vehicle for the for-profit tourism development.  This allows both charitable organizations to contribute funds, own shares, locate suitable tourism industry partners and build and operate the tourism project.  The US charitable organization’s ownership in the South African entity is acceptable under US tax law.  Furthermore, the for-profit venture furthers the charitable purpose of the conservation organization because it promotes education and conservation awareness and it also significantly assists the local community through job creation and micro enterprise.  Aside from the ownership in the for-profit entity, the charitable organization can promote its charitable conservation purposes by providing educational tours and conservation information to the tourism project guests who seek to tour the conservation area and learn more about the ecosystem and marine and wildlife habitat.

This dual-purpose activity – which I call parallel activity – allows the charitable organization to be involved in the above example both from a for-profit ownership perspective in the tourism project and in charitable, exempt purpose activity (tours, education and conservation) for the guests of the tourism project.  Thus, the project enhances the charity in multiple ways – both for-profit and nonprofit – and it bolsters and supports the organizations reputation and standing with the indigenous community because the project met the community’s need for job opportunities and profits.

For-profit organizational documentation may contain provisions that indicate or dictate the social mission and purpose of the social venture.  The Bylaws or Operating Agreement can also contain the social purposes of the venture.  Furthermore, provisions regarding management of the social venture can be drafted to incorporate the social entrepreneur’s vision and values into the for-profit entity.   Of course, Bylaws, shareholder agreements or Operating Agreements can be amended or management, under the fiduciary duty to promote the best interests of the shareholders can simply ignore this language and act in a manner most beneficial to the financial interests of the shareholders.  Thus, when using a for-profit entity to conduct social ventures – control of the management and voting at the shareholder and director level – is imperative.

For example, a charitable organization client was involved in a social venture in natural resources and energy.  The charitable organization was the founder of the project.  The charitable organization established a for-profit entity to manage and operate the project.  The organizational documents and business plans  included generous funds to be set aside for education and health for the indigenous community and environmental management of conservation protected areas surrounding the project.  In order to finance the project, a venture capital company agreed to purchase convertible preferred shares in the for-profit entity.  Of course, the complex legal documents contained provisions allow the venture capital company to take management control of the for-profit entity under certain conditions such as nonperformance of the project (which basically means the project was not performing financially according to projections).  The for-profit nature resources project operated and performed well – but not to the projected levels in the projected timeframe.  Utilizing this small exception, the venture capital took management control of this profitable project and dispensed with the social venture provisions and the funding set aside for the local community education, health care and conservation under the pretense of acting in the best interests of the shareholders.

Obviously, the lesson there is to take any and all steps necessary to protect the vision, intellectual capital and the project from exploitation.  However, there is generally always some strategy that will successfully circumvent the best drafted provisions in corporate documentation.  Fortunately, with the significant rise of social venture funding for social entrepreneurs, the social venture entrepreneur or charitable organization can be paired up with like-minded social investors to avoid such painful examples as noted above.

Traditional Types of For-Profit Entities:

Whether as a stand-alone entity or as the joint venture vehicle for conducting a social venture, the all-purpose entity that best lends itself to social venture activity is the LLC.  A limited liability company is a  privately owned legal entity that can be formed for the purpose of generating and realizing profits, pursuing a social venture purpose, or both.  

An LLC differs from the traditional C-corporation in that the LLC is formed and owned by “members” rather than “shareholders”.  In fact, LLC’s are more similar to partnerships than to corporations, with the advantage of limited liability for the members that is equivalent to the limited liability enjoyed by shareholders of a business corporation. Each state has laws allowing for the establishment of LLCs which generally  allow great flexibility in structuring,  entity governance and management.  Like partners, the members have wide latitude in allocating profits and losses and management powers among themselves.  Furthermore, the corporate fiduciary duties, corporate governance and corporate doctrines such as “piercing the corporate veil” have limited or reduced applicability to LLCs.  This is beneficial to the social venture and its management because this will allow them more freedom to act in a more socially-beneficially manner versus acting in the best interests (or best financial interests) of the shareholders.

From an economic and tax perspective, the LLC is much better than a business corporation as a vehicle for social ventures, especially for joint ventures between a charitable organization and a for-profit business. Because LLCs are generally pass-through entities (unless they elect otherwise), all income, loss, deduction and other tax consequences pass-through to each member in accordance with the member’s interest.  Thus, LLCs and their members do not incur “double taxation” (taxing income at the corporate level and then again at the shareholder level).  If related to the charitable purposes of a charitable organization, the income from the LLC is not taxable so long as it is used in furtherance of charitable purposes.  If the income is unrelated business taxable income (“UBIT”), the tax consequences are incurred at the charitable organization level for this income in accordance with the complex rules of UBIT in the Internal Revenue Code.

From a management and documentation standpoint, the LLC operating agreement – which is similar in function to corporate bylaws and a shareholder agreement in a single document — may contain provisions mandating social purposes or socially-beneficial values and such purposes or values can be incorporated throughout the operating agreement.  LLCs, and particularly the new L3C, are well-suited for social ventures with a limited number of investors and small to mid-sized revenues.  However, if shares are to be offered to the public, or frequent investor turnover is expected, a business corporation will probably serve better than an LLC.  If the for-profit business is going to have significant revenue, is planned to have public shareholders or be publicly-traded or if circumstances warrant in the transaction, then a traditional business corporation may also be well-suited as the structural vehicle for a social venture.

The traditional and prevalent entity for the conduct of for-profit business in the United States is the business corporation, sometimes referred to as a “C” corporation because of the taxing provisions in Subchapter C of the Internal Revenue Code.  C-Corporations are generally formed for a specific and stated “business purpose” of conducting some profit-making activity and distributing its earnings and profits to its shareholders.  Generally speaking, the Bylaws of a business corporation may include a social mission, social business purpose or social values.  For a variety of reasons, this language would merely authorize the corporation to pursue its social mission, however, it could not require it to do so. Only through action of the shareholders of the corporation can require the corporation to pursue a social mission or adhere to certain core set of social values.  This can be accomplished by the shareholders through a shareholder resolution or through a shareholder agreement.  A shareholder’s agreement is an agreement between the shareholders of a company relating to the management and conduct of business of the corporation. It can be used to enhance (or restrict) the rights, duties and obligations of the shareholders and the management and activities of the Board of Directors and Officers.

 Generally speaking, the shareholders are the “owners” of the corporations through the issuance of shares of stock to represent their ownership interests.  A Board of Directors is elected by the shareholders to manage the company and these directors have a fiduciary duty to operate the company in the best interests of the shareholders. Because the “best interests of shareholders” is typically interpreted to mean the shareholder’s best economic interests, most experts agree that the pursuit of financial profit for the benefit of the shareholders is the primary purpose of a business corporation. A case can be made, however, that the shareholders’ best interests can also be furthered through a social venture to achieve a socially-beneficial goal or purpose.  This becomes clearer, of course, where the shareholders have endorsed the social mission or social purpose by including such a provision in the Bylaws or a shareholder agreement.  In this case, the Board of Directors would have explicit authority to produce social outcomes through the social venture as well as profits.  In most, if not all cases, the Board of Directors should rely on this explicit authority from the shareholders instead of an implied or undocumented social venture purpose before leaping into the accomplishment of a social venture. 

For most of the reasons discussed herein (which are merely a discussion and should not be relied upon as legal advice), an LLC is generally the better vehicle for the accomplishment of social venture purposes.  This is true either as a stand-alone social venture business or as a joint venture or subsidiary of a for-profit or charitable organization.  In the next Part V, we will discuss joint ventures and non-traditional for-profit business entities as vehicles for social venture activity by social entrepreneurs.

B. Ray Dinning, JD, LLM (taxation) is a United States based attorney specializing in nonprofit joint ventures, social ventures, domestic and international taxation and public private partnerships.   Mr. Dinning assisted Professor Michael I. Sanders with the research and drafting of the authoritative legal text in this area called “Partnerships and Joint Ventures Involving Tax Exempt Organizations by John Wiley & Sons in 1994 with later editions.  Mr. Dinning holds an Advanced Law Degree from Georgetown University Law Center in Taxation – an LL.M in Taxation.  Mr. Dinning has traveled around the world structuring social ventures from the grassroots to the National and International level.  Mr. Dinning can be reached for questions, comments or advice at (757) 232-2619.

Utilizing Nonprofit Organizations as Vehicles for Social Ventures

By:  Ray Dinning, JD, LLM (taxation)

Part II

December 2, 2009

Domestic and international joint ventures involving nonprofit organizations are excellent vehicles for social ventures.  See Sanders, “Joint Ventures Involving Tax Exempt Organizations (Wiley & Sons 2004). Generally, nonprofit organizations are permitted to conduct for-profit, commercial activities which can be structured in a variety of ways.  In this article, we will discuss three principal (and basic) ways that a nonprofit can be used for social ventures:

First, a simple nonprofit corporation (without federal tax exempt status) can be used as the structural vehicle for a social venture. Although nonprofits are often thought of as charitable, tax-exempt entities, the two are not the same. Nonprofit corporations are a created under state law whereas tax exempt status (which allows for tax deductibility of charitable contributions among other things) is a function of federal tax law.  Thus, utilizing a nonprofit corporation created under state law as a “taxpaying nonprofit” would allow a social venture to conduct commercial activity in support of its corporate purposes. This has advantages for social entrepreneurs under the specific circumstances where a common purpose – even a common business purpose – is pursued but where the social venture does not require much capital and the generation and distribution of profit is not a significant concern.

Although nonprofit corporations under state law are not “owned” by anyone in the classic sense, these nonprofits typically have members who exercise the same kind of control as the owners of a business, and those members can engage in a wide variety of transactions with the nonprofit entity. The organization itself is formed for a nonprofit purpose, so the managers are legally obligated to further the nonprofit’s social mission rather than focusing solely on maximizing profit for the owners.  This basic structure is rarely used but is effective for social ventures where the business activity and the revenue generated in not substantial. The benefits are simplicity of start-up cost and simplicity of use.

Second, a tax-exempt charitable organization under Section 501(c)(3) may be utilized as the structural vehicle for social ventures. A charitable, tax-exempt organization is permitted, for example, to carry on a business that supports it charitable purposes, so long as no individual or entity is receiving financial benefits except as reasonable compensation for services rendered. A tax-exempt organization created to reduce unemployment, for example, can operate a clothing manufacturing business that employs disadvantaged individuals and which sells its clothing on the open market at a profit. If it wants to use recycled materials or organic cotton, or pay its employees a higher wage, it may do so, even though such measures may impair or eliminate the venture’s profitability.  Obviously, the commercial activity of the social venture should further the charitable purposes of the organization and the profits derived therefrom must be used to further the tax-exempt purposes of the organization.  The Board of Directors that governs the organization must use care to ensure that the nonprofit stays on mission – similar to a business corporation – but there are no corporate fiduciary duties to maximize profits or act in the best interest of shareholders which allows the Board of Directors to have more latitude to serve the social purpose the organization.  If the business is low profit or no-profit, there are a variety of ways in which the organization can receive tax-deductible contributions to subsidize it, which isgenerally not an option for for-profit businesses or taxpaying nonprofits.

Finally, tax-exempt organizations can also enter into joint ventures with other non-profits or for-profit businesses to conduct one or more social ventures. Although more complex in its structure, this social venture structure has the greatest flexibility and allows for both nonprofit and for-profit activity to be conducted at the same time through different (but allied) entities.  A joint venture is another legal term under tax law that simply refers to a contractual arrangement or understanding whereby more than one person or entity will operate a venture.  If two nonprofits want to jointly operate a revenue generating activity, they can do so under general tax rules. Each may contribute capital to the venture and they may divide profits.  As stated above, the social venture under these circumstances must further the legitimate interests of each tax-exempt organization.

Under the joint venture structure, nonprofit organizations may utilize limited liability companies (LLC’s) or limited partnerships as vehicles for such social joint ventures, because they offer a flexible structure, pass-through tax treatment, and limited liability, which protects the members of the LLC from being held liable for debts of the joint venture (which is important to tax-exempt organizations).

This is a basic discussion of the nonprofit structures which may be utilized for social ventures.  Of course, each social entrepreneur and each social venture has its own specific circumstances, needs and limitations which must be taken into account in structuring any social venture.  The tax consequences in each transaction must be examined to ensure that all applicable state, federal (and international) laws are complied with by the social venture.  For more information, please contact your tax professional for legal and tax guidance.  For more information or to speak with a tax professional, please feel free to contact Ray Dinning, JD, LLM at (757) 232-2619 for specific guidance or information in structuring your social venture.

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Solange Mangano, fosta miss Argentina in 1994, a murit in urma unei operatii estetice la fund. Lichidul injectat in fese la o clinica specializata din Buenos Aires, menit sa-i ofere acesteia bucuria unui posterior mai ferm, i-au afectat plamanii si creierul, aceasta murind pe 29 noiembrie 2009 cu diagnosticul embolism pulmonar. 

Potrivit unui apropiat, designerul Roberto Piazza, ” o femeie care avea totul, a murit pentru ca a vrut sa aiba un fund ceva mai ferm”

Spun eu: exista un proverb romanesc - ce nu ne omoara, ne intareste. Cred ca asa a gandit si Solange Mangano despre fesele ei, numai ca, din pacate, in cazul ei, nu a tinut cont de prima parte a proverbului, sfarsitul fiind tragi-comic, oricat de mult ai tine la solemnitatea unui astfel de moment.

poze Solange Mangano

Solange Mangano

SOLANGE MAGNANO

Structuring Social Ventures:  Choice of Legal Structure

By:  B. Ray Dinning, JD, LLM (taxation)

November 29, 2009

Part I – Introduction

This is Part One of a Four Part Series on Choice of Legal Structure for Social Ventures

Social Ventures and social entrepreneurship are alive and well in the for-profit and non-profit communities, universities, foundations and with social investors worldwide.  With every major MBA Program educating future business leaders about the social benefits of ventures that make money and help others and with amazing examples of social entrepreneurship by Professor Yunus and the Grameen Bank, Social Ventures are the business wave of the future.  With roughly 2/3rds of the world’s population living with an income of $2 a day, the applicability of technology and products to this burgeoning world market is a new phenomenon.  Bill Gates, Richard Branson and others are finding new ways to market products and services to this market.  Innovation is a key component to this process as products must be re-engineered to be affordable to the world market.  For example, the wind up computer, cell phones and other technology are currently being marketed and sold to this demographic group.  In Africa, this challenge is even greater and the need more prolific.  One thing is certain:  social entrepreneurship is the wave of the future in world markets.

A social venture is an undertaking by a firm or organization established by a social entrepreneur that seeks to provide systemic solutions to achieve a sustainable, social objective. The distinguishing characteristic of the social venture versus the commercial venture is the primacy of their objective to solve social problems and provide social benefits to those in need. The social venture may generate profits, but that is not its focus. Rather profits are the mechanism to achieve sustainability in providing a social benefit. The problems addressed by social ventures cover the range of social issues, including poverty, inequality, education, the environment, and economic development.

The challenge in this fast-paced developing area is that guidance in how these beneficial ventures should be structured is amorphous and undefined. Some have estimated that – depending on how one defines social enterprise – this activity could account for as much as 4 trillion dollars in the global economy. Social Enterprise Alliance estimates in a recent poll, 71% of respondents reported that making a determination as to the proper and best legal structure for their social ventures was the greatest challenge they faced. The pool of respondents included not just people who were starting new ventures, but also investors seeking a social return on investment (SROI) in addition to financial returns.

Because so many legal disciplines are necessary to properly structure a venture which many include non-profit, for-profit and even community partners and where business principles must be modified, it is hard to find concrete guidance in how to set up and structure social ventures.  The legal areas implicated in a structuring social ventures include:  tax, non-profit, corporate, partnership, international, mergers & acquisitions, business entity formation and perhaps more.

Social ventures can be structured in several legal formations including, but not limited to: business for-profit corporations, nonprofit corporations, tax-exempt organizations, for-profit subsidiaries of nonprofit entities, limited liability companies, charities created by business corporations, joint ventures, and less formal structures created through financing, shareholder and licensing agreements.  New forms of business structures including the use of the L3C entity and the so-called “B Corporation” are also adding to the mix of potential business structures available to social entrepreneurs.

Perhaps because of our capitalistic roots and the emphasis in the United States on profit and wealth generation or simply because of the relative infancy of social enterprises and social ventures, our legal system in the United States does not provide a legal form that is designed to accommodate the particular needs of social ventures.  Obviously, public companies have, as their primary objective, the bests interests of the shareholders of the company which, to date, has allowed them to pursue “green” or eco-friendly ventures as an aside to their primary objective of producing a good or service which generates profits for the shareholders.  Non-profit organizations have social good and charitable purposes as their primary objective but many complex rules and onerous penalties exist for the organization and its directors should their profit making objectives be structured improperly, become too large or simply conflict with their tax-exempt social purposes.  Additionally, non-profits face potential donor confusion when they start to introduce the concept of “business” and “profit” to their donor base.  Thus, many pitfalls, regulatory landmines and business issues such as access to capital and modifying the traditional rules of business come into play when attempting to structure a social venture.

In structuring a social venture, the ideal legal structure for social enterprise would allow management to pursue the dual goals of profit and social benefit within a single venture. It would allow the venture to raise private capital and compensate investors for the use of their capital on competitive terms but also management to make business decisions that further the social mission of the venture, even at the risk of reducing profits.  This ideal legal structure would also allow donors to support the social purposes of the venture with tax-deductible contributions, provided the money they give is a gift and they do not receive anything in return. Such an enterprise could freely enter into joint ventures and other business relationships with charities or for-profit companies without jeopardizing the tax or corporate status of the participating entities or exposing management to complex regulation or potential liability. Under the right circumstances, the social enterprise itself could become exempt from paying tax on its net revenues.

Next, we will discuss Foundations of the social venture movement.

B. Ray Dinning, JD, LLM (taxation) is a United States based attorney specializing in nonprofit joint ventures, social ventures, domestic and international taxation and public private partnerships.   Mr. Dinning assisted Professor Michael Sanders with the research and drafting of the authoritative legal text in this area called “Partnerships and Joint Ventures Involving Tax Exempt Organizations by John Wiley & Sons in 1994 with later editions.  Mr. Dinning holds an Advanced Law Degree from Georgetown University Law Center in Taxation – an LL.M in Taxation.  Mr. Dinning has traveled around the world structuring social ventures from the grassroots to the Heads of State.  Mr. Dinning can be reached at (757) 232-2619.

Mit den Girls wird unter Tags Winnie Puh von der Festplatte oder DVD geschaut, aber in der Nacht, wenn die zwei schlafen, zeigt der Bär sein wahres Gesicht … die zwei also mitten im Geschehen Seargent Pooh und Private Ferkel

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urme de buze

atent, penisul tau imi pipaie timpanul, fosnind in asternuturi. imi incordez pulpele si astept sa ajungi acolo, pentru acel du-te-vino iute dintre ele, ca mai apoi sa-mi lipesc fundul de coapsele tale, oferindu-ti acces nelimitat in locul umed si stramt care te obsedeaza

umed si stramt

umed si stramt

ca o noapte plina de faradelegi

ca o zi necuminte

fragila

in locul meu

pe pieptul tau

a ramas urma buzelor care ti-au zis

da, mi-a fost dor

like a woman on top

patrunsa pe acoperisul lumii.

Gordon Brown denies claims that money from an "anti-extremist" fund was given to two schools with alleged links to Islamic extremists…. From BBC News. Full story

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