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.

In fellowship program we had a NGO vist.

Agasthya

As Deshpande Foundation is very well known as funding organization, it funds many NGO in Hubli – Dharwad. We visited some of the NGO in Hubli and Dharwad like Akshaya Patra, Agasthya and others. We were thought how these organazitions are contrubuting to the society and what is the impact on the society.

I felt very happy because i have only heard about NGO working but here i got the chance to see with my eyes and to feel. Thanks gto Deshpande Fellowship Program.

There are A LOT of young people who want to work in sports. They can be found, of course, in sports management programs from the undergraduate to doctoral levels, and in pretty much any business or liberal arts program. Frankly, they can be found anywhere. And when it comes to having a desire to work in sports, let’s not forget those already working who would love to trade in for something sports-related.

With such high demand, what can we do as an industry to increase the dearth of opportunities? One way is to tap into the entrepreneurial juices of the young and old. A trend we are seeing that has relevance for the sports industry is the increase in social entrepreneurship programs. The inherent “social” component of sports, and the need to create more opportunities, an inherent aspect of entrepreneurship, within the industry should encourage collaboration between companies and league properties and these emerging entrepreneurs and companies. Hopefully we will see that take place.

You can read the full article from Diana Middleton at the Wall Street Journal at http://online.wsj.com/article/SB10001424052748704107204574469602649140462.html, with an excerpt below.

(Excerpt)

M.B.A.s Seek Social Change; Enterprises With a Cause Gain Ground on Campus

by Diana Middleton

During his M.B.A. studies at University of California at Berkeley, Jeff Denby told everyone his ultimate career goal: to start an underwear company.

Soon, professors and classmates at the Haas School of Business began to call him “the underwear guy.”

But Mr. Denby—who had formerly worked in industrial design and went to business school interested in supply-chain management—decided early in his program that he wanted to create a company that was about more than just boxers or briefs. In his view, it was critical to create a product that was environmentally friendly and sustainable—and whose sales could help support good causes.

This type of social entrepreneurship – that is, building a for-profit company with a social conscious or linked with a social cause – is becoming increasingly attractive to would-be business founders. The idea is to make money while either directly impacting consumers with its services or funneling a portion of profits to charities. Often, these companies employ people or source resources from economically depressed areas of the world that then also benefit from the charitable donations from the profits.

And with an increased interest in socially-responsible money-making, business schools have been pushed to create a whole host of courses and study tracks to help M.B.A. students sort out the best way to pull it off. Schools like University of Oxford, Cornell University and Dartmouth College have all seen increased demand for instruction in social entrepreneurship.

Some administrators say it’s a generational progression of business-school students who have grown up more socially aware. Others say a lack of traditional jobs has spurred an interest in entrepreneurial ventures—and the focus on societal impact is partly a matter of trying to escape the stigma of the “greedy M.B.A.”

“I think the interest in entrepreneurial ventures with social value [is about] more than the fact that people can’t get jobs as easily,” says Colin Mayer, dean of Oxford’s Saïd Business School in the U.K. “There’s also a sort of underlying sense of guilt about what happened during the crisis.”

(The article continues at http://online.wsj.com/article/SB10001424052748704107204574469602649140462.html)

What Does Go Green Mean? Green can mean many different things to different people. For some, it means simply environmentally friendly and to others means living a life that is not dangerous to the health of people or animals

When you Go Green you only use green house products that are healthy for the environment and include no toxins, you recycle to help save land fills, and you do everything possible to live healthy and reduce the impact on our earth. By living green and going green you reduce any negative impact on the planet in all possible ways.

The truth is that everything single thing we do every day has an impact on the planet — good or bad. The good news is that as an individual you have the power to control most of your choices and, therefore, the impact you create: from where you live to what you buy, eat, and use to light your home to where and how you vacation, to how you shop, you can have global impact

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“Inventing is a combination of brains and materials. The more brains you use, the less material you need.” -  Charles. F. Kettering

At no time in history has mankind been presented with greater opportunity for the global interaction of innovation and imagination, unbounded by time or geography.  The advancement of technology has created communication networks that allow global challenges to be addressed by international networks of problem solvers using instantaneous communications and unlimited perspectives. The enormity of this opportunity, however, is met by an equally great number of challenges. Throughout the word billions of men, women and children live in need – need of a more sustainable life, more sustainable communities, and a more sustainable world.  Indeed, in an era where global opportunity is almost blinding, we can’t lose sight of those who may live in our collective blindspots.

Given the way that technology has become a fundamental aspect of contemporary problem-solving, it has become easy to casually assume that any human challenge can be met easily by the application of existing or advancing technology.  But that isn’t always the case; some problems require custom technologies that deviate from existing technology pathways that might otherwise go unexamined. Also, the casual observer often assumes that simply providing technological tools to communities is a satisfactory substitute for the systemic integration of entrepreneurship and technology in communal development.  Rather, it this systemic integration that does more than respond to a need, it helps stimulate communal (and collective) imagination and innovation.

With this in mind, perhaps one of the best examples of this integration is the work of Jack Sim, a social entrepreneur, Ashoka Fellow and founder of the World Toilet Organization (WTO).

Now truth be told, I learned of Jack’s work by accident.  My birthday was November 19^th and unbeknownst to me (until a friend duly pointed it out), that date is World Toilet Day. Putting aside my friends chiding (insert your own birthday/toilet joke here), I was genuinely curious and even more genuinely amazed by what I learned about that day.  For over a decade, Jack and the WTO have been vital voices in developing global improvements in sanitation that provide millions of individuals the opportunity to live healthy and dignified lives in communities with sustainable sanitation programs. Seeing a need, Jack helped shape and pursue a vision of a world where sanitation is not an aspiration, but rather an actualization of a community’s ability to care for itself.

But identifying a need, sharing a vision and having an entrepreneurial spirit wasn’t enough; something more was needed.

Jack’s success wouldn’t be possible without technology and innovation as well. There has been a steady progression of improvement in sanitation technology including the recent development of compost toilets for public use. Just as importantly, there has been innovation in the ways communities are educated about sanitation needs, innovation in the way funds are raised and allocated for the enhancement of global sanitation, and imagination in the way communications technology can be leveraged to create global awareness of the fact that over 2.5 billion people worldwide don’t have access to sanitation.

And that is the lesson – because of Jacks’ entrepreneurial spirit, the accompanying technological developments and systemic innovation, the WTO and organizations in 57 countries across the world are now focused on an issue that for far to long has been in the outhouse of global awareness. Proving once again that the combination of entrepreneurship, technology and social innovation are a terrible thing to waste  – literally and figuratively.

Social Venture Capital on the Rise

By:  Ray Dinning, JD, LLM

In 2009, social venture funds are ramping up at an unprecedented scale. At least seven new and follow-on funds dedicated to social ventures and social entrepreneurship have raised over $1 billion this year.  In fact, Vinod Khosla has raised approximately $1 billion for green projects and social ventures in 2009.

“It’s really peaked in the last six months,” says David Chen, founder of Equilibrium Capital, a planned $200 million fund focused on the cleantech and wellness sectors. Commencing in the Fall of 2008, Chen has seen a great increase in interest levels from investors in the social venture asset class.

The rise in social venture comes as institutional and accredited investors are putting significantly more money into so-called socially responsible investment (SRI) vehicles. Today, roughly $2.71 trillion—or 11% of assets under professional management in the United States—are now involved in SRI, according to the Social Investment Forum, a trade group.

Resources like Social Venture Network and social venture legal specialists like B. Ray Dinning, JD, LLM are providing guidance to the burgeoning social venture market.  Social Entrepreneurs require necessary capital but they also need guidance in proper structuring of these helpful ventures.

Social Venture Capital on the Rise

By:  Ray Dinning, JD, LLM

In 2009, social venture funds are increasing rapidly on an unprecedented scale. At least seven new and follow-on funds billed as social venture or social entrepreneurship funds are on track to raise about $ 1 billion this year

“It’s really peaked in the last six months,” says David Chen, founder of Equilibrium Capital, a planned $200 million fund focused on the cleantech and wellness sectors. Commencing in the Fall of 2008, Chen has seen a significant increase in interest levels from investors in the social venture arena.

The rise in social venture comes as institutional and accredited investors are putting significantly more money into so-called socially responsible investment (SRI) vehicles. Today, roughly $2.71 trillion—or 11% of assets under professional management in the United States—are now involved in SRI, according to the Social Investment Forum, a trade group.

Resources like Social Venture Network and social venture legal specialists like B. Ray Dinning, JD, LLM are providing guidance to the burgeoning social venture market.  Social Entrepreneurs require necessary capital but they also need guidance in proper structuring of these helpful ventures.

Social Venture Capital on the Rise

By:  Ray Dinning, JD, LLM

In 2009, social venture funds are rapidly increasing at an unprecedented scale. At least seven new and follow-on funds billed as social venture or social entrepreneurship funds are on track to raise about $1 billion this year

“It’s really peaked in the last six months,” says David Chen, founder of Equilibrium Capital, a planned $200 million fund focused on the cleantech and wellness sectors. Commencing in the Fall of 2008, , Chen has seen a great increase in interest levels from investors in the social venture investment area.

The rise in social venture comes as institutional and accredited investors are putting significantly more money into so-called socially responsible investment (SRI) vehicles. Today, roughly $2.71 trillion—or 11% of assets under professional management in the United States—are now involved in SRI, according to the Social Investment Forum, a trade group.

Resources like Social Venture Network and social venture legal specialists like B. Ray Dinning, JD, LLM are providing guidance to the burgeoning social venture market.  Social Entrepreneurs require necessary capital but they also need guidance in proper structuring of these helpful ventures.

Social Venture Capital on the Rise

By:  Ray Dinning, JD, LLM

In 2009, social venture funds are increasing their funding drives on an unprecedented scale.  At least seven new and follow-on funds dedicated to social ventures or social entrepreneurship are on track to raise over $1 billion this year

“It’s really peaked in the last six months,” says David Chen, founder of Equilibrium Capital, a planned $200 million fund focused on the cleantech and wellness sectors. Commencing in the Fall of 2008, Chen has seen a marked increase in interest levels from investors in social ventures.  It is truly a great way to “do good and make money.”

The rise in social venture comes as institutional and accredited investors are putting significantly more money into so-called socially responsible investment (SRI) vehicles. Today, roughly $2.71 trillion—or 11% of assets under professional management in the United States—are now involved in SRI, according to the Social Investment Forum, a trade group.

Resources like Social Venture Network and social venture legal specialists like B. Ray Dinning, JD, LLM are providing guidance to the burgeoning social venture market.  Social Entrepreneurs require necessary capital but they also need guidance in proper structuring of these helpful ventures.

Social Venture Capital on the Rise

By:  Ray Dinning, JD, LLM

In 2009, social venture funds are increasing pace at an unprecedented scale. At least seven new and follow-on funds billed as social venture or social entrepreneurship funds are on track to raise over $1 billion this year

“It’s really peaked in the last six months,” says David Chen, founder of Equilibrium Capital, a planned $200 million fund focused on the cleantech and wellness sectors. Commencing in the Fall of 2008, Chen has seen a great increase in interest levels from investors in the social venture asset class.

The rise in social venture comes as institutional and accredited investors are putting significantly more money into so-called socially responsible investment (SRI) vehicles. Today, roughly $2.71 trillion—or 11% of assets under professional management in the United States—are now involved in SRI, according to the Social Investment Forum, a trade group.

Resources like Social Venture Network and social venture legal specialists like B. Ray Dinning, JD, LLM are providing guidance to the burgeoning social venture market.  Social Entrepreneurs require necessary capital but they also need guidance in proper structuring of these helpful ventures.

Structuring Social Ventures:  Choice of Legal Structure

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

November 30, 2009

Part II

Foundations of Social Venture Legal Structures

The Foundations of Legal Structures for Social Ventures

In 1992-1994, I was privileged to provide research, drafting and editing skills to my esteemed professor, Mr. Michael I. Sanders, in the creation of his authoritative legal treatise, “Joint Ventures Involving Tax Exempt Organizations (Wiley & Sons).  This early work set the stage for the concept of the modern day social ventures.   Having structured hundreds of social ventures in the United States and, in fact, worldwide, the choice of entity generally depends on the specific facts of the transaction and the needs of the parties involved.  However, generally speaking, the most common legal structures utilized for social ventures, both domestic and international, are the tax-exempt organization, the limited liability company (LLC) and various partnership entities.  When used in a strategic manner designed to meet the needs of the social venture, a legal structure can be created which will allow the social venture to meet both charitable, social needs and also pursue the profit-making activities in a fairly straightforward and simple to use structure.

Tax-exempt, nonprofit organizations are generally designed to provide a structure for its directors and members to pursue a fairly well-defined set of charitable, exempt purposes. However, they are not conducive for the operation of for-profit business activities.  Additionally, tax-exempt organizations are generally not able to raise capital, sell stock or borrow without significant restrictions.  Nonprofit corporations cannot issue stock and therefore have no “owners.” Revenues generated by the nonprofit organizations must remain within it and cannot be paid out to investors or other stakeholders except as reasonable compensation for services rendered.  Its income must be devoted to charitable purposes.  The board of directors of a nonprofit corporation is duty-bound to give its primary attention to pursuit of the social mission rather than the production of net income. Organizations exempt from federal tax under Section 501(c)(3) of the Internal Revenue Code (often referred to generically as charities) must abide by even greater restrictions that prohibit payments to insiders and impose taxes on any business activity that is not directly related to the organization’s tax exempt purposes.   As you will see, however, tax-exempt charitable organizations have been conducting “business” for decades using a typical joint venture structure which allows the charitable organizations to pursue both non-profit activities via the tax-exempt organization and also the for-profit social venture via the “parallel” venture entity – typically a limited liability company or limited partnership.

Take for example, the tax-exempt, nonprofit university dedicated to charitable, educational, scientific and other charitable purposes.  Many large universities make millions of dollars per year on corporate sponsorship, advertising, concessions and branding of their sports programs such as college football.  Hospitals conduct a myriad of non-profit and for-profit activities under the large umbrella of a tax-exempt organization.  Low income housing tax credit ventures link profitable developers and construction companies to non-profit housing development agencies to provide low cost housing to those in need.  These non-profit and for-profit purposes have co-existed since the 1970s under the careful structuring of a few legal professionals who possess the requisite skills to provide tax, corporate, partnership and non-profit legal advice.  With the recent advent of “social ventures” and the skyrocketing use of these social entrepreneurship projects worldwide, it is actually the lawyers, accountants and governmental agencies who are trying to play catch-up which is much of the cause of the confusion.

For-profit business corporations, on the contrary, have shareholders (owners) and a board of directors (carrying out the general business of the organization) and perhaps officers and managers (who do the day to day operating of the business).  The directors of the corporation have certain fiduciary duties to the business and the shareholders which require them to always act in the best interests of the shareholders and the corporation.  Unless a link exists which can tie their social venture activities directly to some business purpose, the managers and directors of for-profit companies may be sued for breach of their fiduciary duties and misuse of corporate assets. Only in cases where the owners of the business are in agreement with the idea of operating in a socially responsible manner, or dedicating a percentage of profits to charitable causes, can such activity take place.  Even then, this fragile balance of business and social purposes can be destroyed by a drop in corporate earnings or an unforeseen consequence of the social venture or the lack of reaching  the projected profits from a social venture or the complaint of one or more shareholders.

So, what is the answer to the question of proper legal structure?  That begins Part III of the Series.

B. Ray Dinning is a United States attorney specializing in nonprofit joint ventures and public private partnershps  Ray 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 can be reached at (757) 232-2619.

Structuring Social Ventures:  Choice of Legal Structure

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

November 30, 2009

Part II

Foundations of Social Venture Legal Structures

The Foundations of Legal Structures for Social Ventures

In 1992-1994, I was privileged to provide research, drafting and editing skills to my esteemed professor, Mr. Michael I. Sanders, in the creation of his authoritative legal treatise, “Joint Ventures Involving Tax Exempt Organizations (Wiley & Sons).  This early work set the stage for the concept of the modern day social ventures.   Having structured hundreds of social ventures in the United States and, in fact, worldwide, the choice of entity generally depends on the specific facts of the transaction and the needs of the parties involved.  However, generally speaking, the most common legal structures utilized for social ventures, both domestic and international, are the tax-exempt organization, the limited liability company (LLC) and various partnership entities.  When used in a strategic manner designed to meet the needs of the social venture, a legal structure can be created which will allow the social venture to meet both charitable, social needs and also pursue the profit-making activities in a fairly straightforward and simple to use structure.

Tax-exempt, nonprofit organizations are generally designed to provide a structure for its directors and members to pursue a fairly well-defined set of charitable, exempt purposes. However, they are not conducive for the operation of for-profit business activities.  Additionally, tax-exempt organizations are generally not able to raise capital, sell stock or borrow without significant restrictions.  Nonprofit corporations cannot issue stock and therefore have no “owners.” Revenues generated by the nonprofit organizations must remain within it and cannot be paid out to investors or other stakeholders except as reasonable compensation for services rendered.  Its income must be devoted to charitable purposes.  The board of directors of a nonprofit corporation is duty-bound to give its primary attention to pursuit of the social mission rather than the production of net income. Organizations exempt from federal tax under Section 501(c)(3) of the Internal Revenue Code (often referred to generically as charities) must abide by even greater restrictions that prohibit payments to insiders and impose taxes on any business activity that is not directly related to the organization’s tax exempt purposes.   As you will see, however, tax-exempt charitable organizations have been conducting “business” for decades using a typical joint venture structure which allows the charitable organizations to pursue both non-profit activities via the tax-exempt organization and also the for-profit social venture via the “parallel” venture entity – typically a limited liability company or limited partnership.

Take for example, the tax-exempt, nonprofit university dedicated to charitable, educational, scientific and other charitable purposes.  Many large universities make millions of dollars per year on corporate sponsorship, advertising, concessions and branding of their sports programs such as college football.  Hospitals conduct a myriad of non-profit and for-profit activities under the large umbrella of a tax-exempt organization.  Low income housing tax credit ventures link profitable developers and construction companies to non-profit housing development agencies to provide low cost housing to those in need.  These non-profit and for-profit purposes have co-existed since the 1970s under the careful structuring of a few legal professionals who possess the requisite skills to provide tax, corporate, partnership and non-profit legal advice.  With the recent advent of “social ventures” and the skyrocketing use of these social entrepreneurship projects worldwide, it is actually the lawyers, accountants and governmental agencies who are trying to play catch-up which is much of the cause of the confusion.

For-profit business corporations, on the contrary, have shareholders (owners) and a board of directors (carrying out the general business of the organization) and perhaps officers and managers (who do the day to day operating of the business).  The directors of the corporation have certain fiduciary duties to the business and the shareholders which require them to always act in the best interests of the shareholders and the corporation.  Unless a link exists which can tie their social venture activities directly to some business purpose, the managers and directors of for-profit companies may be sued for breach of their fiduciary duties and misuse of corporate assets. Only in cases where the owners of the business are in agreement with the idea of operating in a socially responsible manner, or dedicating a percentage of profits to charitable causes, can such activity take place.  Even then, this fragile balance of business and social purposes can be destroyed by a drop in corporate earnings or an unforeseen consequence of the social venture or the lack of reaching  the projected profits from a social venture or the complaint of one or more shareholders.

So, what is the answer to the question of proper legal structure?  That begins Part III of the Series.

B. Ray Dinning is a United States attorney specializing in nonprofit joint ventures and public private partnershps  Ray 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 can be reached at (757) 232-2619.

Structuring Social Ventures:  Choice of Legal Structure

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

November 30, 2009

Part II

Foundations of Social Venture Legal Structures for Churches and other Non-Profits

The Foundations of Legal Structures for Social Ventures

In 1992-1994, I was privileged to provide research, drafting and editing skills to my esteemed professor, Mr. Michael I. Sanders, in the creation of his authoritative legal treatise, “Joint Ventures Involving Tax Exempt Organizations (Wiley & Sons).  This early work set the stage for the concept of the modern day social ventures.   Having structured hundreds of social ventures in the United States and, in fact, worldwide, the choice of entity generally depends on the specific facts of the transaction and the needs of the parties involved.  However, generally speaking, the most common legal structures utilized for social ventures, both domestic and international, are the tax-exempt organization, the limited liability company (LLC) and various partnership entities.  When used in a strategic manner designed to meet the needs of the social venture, a legal structure can be created which will allow the social venture to meet both charitable, social needs and also pursue the profit-making activities in a fairly straightforward and simple to use structure.

Tax-exempt, nonprofit organizations are generally designed to provide a structure for its directors and members to pursue a fairly well-defined set of charitable, exempt purposes. However, they are not conducive for the operation of for-profit business activities.  Additionally, tax-exempt organizations are generally not able to raise capital, sell stock or borrow without significant restrictions.  Nonprofit corporations cannot issue stock and therefore have no “owners.” Revenues generated by the nonprofit organizations must remain within it and cannot be paid out to investors or other stakeholders except as reasonable compensation for services rendered.  Its income must be devoted to charitable purposes.  The board of directors of a nonprofit corporation is duty-bound to give its primary attention to pursuit of the social mission rather than the production of net income. Organizations exempt from federal tax under Section 501(c)(3) of the Internal Revenue Code (often referred to generically as charities) must abide by even greater restrictions that prohibit payments to insiders and impose taxes on any business activity that is not directly related to the organization’s tax exempt purposes.   As you will see, however, tax-exempt charitable organizations have been conducting “business” for decades using a typical joint venture structure which allows the charitable organizations to pursue both non-profit activities via the tax-exempt organization and also the for-profit social venture via the “parallel” venture entity – typically a limited liability company or limited partnership.

Take for example, the tax-exempt, nonprofit university dedicated to charitable, educational, scientific and other charitable purposes.  Many large universities make millions of dollars per year on corporate sponsorship, advertising, concessions and branding of their sports programs such as college football.  Hospitals conduct a myriad of non-profit and for-profit activities under the large umbrella of a tax-exempt organization.  Low income housing tax credit ventures link profitable developers and construction companies to non-profit housing development agencies to provide low cost housing to those in need.  These non-profit and for-profit purposes have co-existed since the 1970s under the careful structuring of a few legal professionals who possess the requisite skills to provide tax, corporate, partnership and non-profit legal advice.  With the recent advent of “social ventures” and the skyrocketing use of these social entrepreneurship projects worldwide, it is actually the lawyers, accountants and governmental agencies who are trying to play catch-up which is much of the cause of the confusion.

For-profit business corporations, on the contrary, have shareholders (owners) and a board of directors (carrying out the general business of the organization) and perhaps officers and managers (who do the day to day operating of the business).  The directors of the corporation have certain fiduciary duties to the business and the shareholders which require them to always act in the best interests of the shareholders and the corporation.  Unless a link exists which can tie their social venture activities directly to some business purpose, the managers and directors of for-profit companies may be sued for breach of their fiduciary duties and misuse of corporate assets. Only in cases where the owners of the business are in agreement with the idea of operating in a socially responsible manner, or dedicating a percentage of profits to charitable causes, can such activity take place.  Even then, this fragile balance of business and social purposes can be destroyed by a drop in corporate earnings or an unforeseen consequence of the social venture or the lack of reaching  the projected profits from a social venture or the complaint of one or more shareholders.

So, what is the answer to the question of proper legal structure?  That begins Part III of the Series.

B. Ray Dinning is a United States attorney specializing in nonprofit joint ventures and public private partnershps  Ray 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 can be reached at (757) 232-2619.

Structuring Social Ventures:  Choice of Legal Structure

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

November 30, 2009

Part II

Foundations of Social Venture Legal Structures

The Foundations of Legal Structures for Social Ventures

In 1992-1994, I was privileged to provide research, drafting and editing skills to my esteemed professor, Mr. Michael I. Sanders, in the creation of his authoritative legal treatise, “Joint Ventures Involving Tax Exempt Organizations (Wiley & Sons).  This early work set the stage for the concept of the modern day social ventures.   Having structured hundreds of social ventures in the United States and, in fact, worldwide, the choice of entity generally depends on the specific facts of the transaction and the needs of the parties involved.  However, generally speaking, the most common legal structures utilized for social ventures, both domestic and international, are the tax-exempt organization, the limited liability company (LLC) and various partnership entities.  When used in a strategic manner designed to meet the needs of the social venture, a legal structure can be created which will allow the social venture to meet both charitable, social needs and also pursue the profit-making activities in a fairly straightforward and simple to use structure.

Tax-exempt, nonprofit organizations are generally designed to provide a structure for its directors and members to pursue a fairly well-defined set of charitable, exempt purposes. However, they are not conducive for the operation of for-profit business activities.  Additionally, tax-exempt organizations are generally not able to raise capital, sell stock or borrow without significant restrictions.  Nonprofit corporations cannot issue stock and therefore have no “owners.” Revenues generated by the nonprofit organizations must remain within it and cannot be paid out to investors or other stakeholders except as reasonable compensation for services rendered.  Its income must be devoted to charitable purposes.  The board of directors of a nonprofit corporation is duty-bound to give its primary attention to pursuit of the social mission rather than the production of net income. Organizations exempt from federal tax under Section 501(c)(3) of the Internal Revenue Code (often referred to generically as charities) must abide by even greater restrictions that prohibit payments to insiders and impose taxes on any business activity that is not directly related to the organization’s tax exempt purposes.   As you will see, however, tax-exempt charitable organizations have been conducting “business” for decades using a typical joint venture structure which allows the charitable organizations to pursue both non-profit activities via the tax-exempt organization and also the for-profit social venture via the “parallel” venture entity – typically a limited liability company or limited partnership.

Take for example, the tax-exempt, nonprofit university dedicated to charitable, educational, scientific and other charitable purposes.  Many large universities make millions of dollars per year on corporate sponsorship, advertising, concessions and branding of their sports programs such as college football.  Hospitals conduct a myriad of non-profit and for-profit activities under the large umbrella of a tax-exempt organization.  Low income housing tax credit ventures link profitable developers and construction companies to non-profit housing development agencies to provide low cost housing to those in need.  These non-profit and for-profit purposes have co-existed since the 1970s under the careful structuring of a few legal professionals who possess the requisite skills to provide tax, corporate, partnership and non-profit legal advice.  With the recent advent of “social ventures” and the skyrocketing use of these social entrepreneurship projects worldwide, it is actually the lawyers, accountants and governmental agencies who are trying to play catch-up which is much of the cause of the confusion.

For-profit business corporations, on the contrary, have shareholders (owners) and a board of directors (carrying out the general business of the organization) and perhaps officers and managers (who do the day to day operating of the business).  The directors of the corporation have certain fiduciary duties to the business and the shareholders which require them to always act in the best interests of the shareholders and the corporation.  Unless a link exists which can tie their social venture activities directly to some business purpose, the managers and directors of for-profit companies may be sued for breach of their fiduciary duties and misuse of corporate assets. Only in cases where the owners of the business are in agreement with the idea of operating in a socially responsible manner, or dedicating a percentage of profits to charitable causes, can such activity take place.  Even then, this fragile balance of business and social purposes can be destroyed by a drop in corporate earnings or an unforeseen consequence of the social venture or the lack of reaching  the projected profits from a social venture or the complaint of one or more shareholders.

So, what is the answer to the question of proper legal structure?  That begins Part III of the Series.

B. Ray Dinning is a United States attorney specializing in nonprofit joint ventures and public private partnershps  Ray 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 can be reached at (757) 232-2619.

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.

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.

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.

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.

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.

Welcom to SE.

Thanks

It’s been a while since my last post: I was busy with school, different venture competition applications, and a (tiny) bit of travel.

Tomorrow I am going to Skoll:EMERGE and I am thinking about a divide between Business Plan Competitions and Social Enterprise Competitions. Do we really need it? What IF there is an idea that is very viable commercially and also creates a significant social change?

I think that current divide presents a problem for the best projects: when a venture creates both profit and social and/or environmental impact. This hypothetical successful business model could be altered to create even more profits or even more impact, but it will loose a part of its hybrid characteristics.

So, I am thinking about a trade-off between profit and impact. In any organization we could think that there is a trade-off between a profit and an impact: anything from a bagel shop to a homeless shelter to an multinational corporation to a global NGO could have either profit or impact or some combination of both.

What a for-profit will choose:

On the graph to the left, each curve represents  a posible sets of combination of profit and impact for four different hypothetical organizations. If we look at the graph, clearly, traditional business plans will just focus on maximizing profit, so in cases of both black line, green and red line they’ll prefer a point that has zero impact. But in case of yellow dotted line, they will actually be better off with some impact–this will increase the profit.

What a social enterprise will choose:

The idea behind social enterprise (as I see it) is that profit has a place in impact-oriented organizations. Profit solves the problem of scallability and increases the efficiency. With this in mind, a green line social enterprise will choose a combination that is furthest to the right–it will have a highest sum of profit and impact. But about red line organization? It seem to be inefficient as a hybrid organization, yet I don’t know why or if such cases even exist. And a yellow line organization will pick the same point on the curve as the for-profit–this will offer a highest combination of profit and impact. A black line organization can theoretically pick any point on the line, depending on its short-term and long-term goals: whether it puts more emphasis on sustainability or on current impact.

A few questions arise:

1) For-profit and SE seem to merge in yellow–is that a problem? Wouldn’t SE funders push to a higher impact, even though it decreases efficiency?

2) How to distinguish a for-profit from SE in black organization? Is there any cut-off profit/impact ratio (like 60/40) for SE?

3) What to do with red case: is it better to have either strict for-profit or a strict non-profit?

4) Finally, could other organizations organization be redesigned to become more like yellow organization?

My interest is not academical: I have an idea for an organization that is both profitable and will create an impact. So I am thinking how should I frame and design this organization to better serve its goals and to get initial funding.

I’m just thinking and playing here, so if you could forward me some research or provide me some ideas/feedback/criticism, it would great!

APPLICATIONS INVITED FOR “SAARC YOUTH AWARD – 2009″

SAARC invites applications from the youth of the region of participate in the “SAARC Youth Award – 2009″. The aim of the Scheme is to provide suitable recognition to extra-ordinary young talents encourage the overall development of the youth in the region.

Objectives:

i.      to give recognition to the outstanding work done by young persons;

ii.     to provide youth the incentive to achieve excellence in the various fields;

iii.    to improve educational and technical skills of youth and to encourage them in creative activities; and

iv.    to encourage in the youth the development of personality through positive social attitudes and values.

Theme of the Award:

The theme of the Award – 2009 has been decided as “Outstanding contribution to humanitarian works in the aftermath of Natural Disasters”.

Eligibility:

The Award is open to nationals of SAARC Member States who are within the age group of 20-35 years at the time of nomination. The work or achievement, which has been submitted for or received an international or regional award, will not be eligible for consideration.

Description of Award:

i.      A citation in English;

ii.     A SAARC Gold Medal;

iii.    A cash prize of US$ 3000.00 (Three Thousand US Dollars)

iv.    Per diem and return air ticket for travel to the venue of the presentation of the award.

Last Date:

The last date for receipt of applications on the prescribed format published herewith is 15″ December 2009. Neat and typed applications alongwith necessary documents should be sent by Registered / Speed Post at the following address:

Joint Secretary (SAARC) Ministry of External Affairs

Room No. 807, Akbar Shawan, Chanakya Puri, New Delhi-11 0021.

Note: Incomplete applications and entries received after the deadline will not be entertained.

PROFORMA FOR SAARC YOUTH AWARD – 2009

Application for SAARC YOUTH AWARDS SCHEME in the category of:

1. Name of Applicant(In block letters, Underline surname)
2. Sex
3. Father’s Name
4. Date of Birth (In words & figures, supported by a copy of  valid document e.g. National Identity Card/Passport etc.)
5. Nationality
6. Permanent Address
7. Postal Address (Telephonelrelex/Fax with area code)
8. Occupation
9. Outstanding work done recently for which award is to be given. (Please describe in not more than 3000 words indicating the work done and impact on the community. where applicable)
10. Whether any regional/international award has been submitted / received to the work identified in this application? (If yes, give details)
11. Whether the same entry has been nominated earlier for a SAARC Youth Award?
12. Whether applicant has been convicted by any court of law or any case is pending against him/her in any Court?
13. Brief statement on future plans of the applicant for making further improvement in the relevant area of work.

DECLARATION:

I declare that the information provided above is true and correct I am aware that false or misleading information given in relation to this application could result in cancellation of the Award and liability for legal prosecution.

Date ……………….. Applicant’s Signature …………………………………… .

Name

Country

Enclosed

i.   Four passport size photographs;

ii. Certified copies of identification papers.

iii. Description of work alongwith entry.

Note: Forms and Annexes should be filled in triplicate in English language .

Background (skip down a few paragraphs to avoid the self-indulgence):

When I was an undergrad in business school I always had this super heroes idea of using business skills for stakeholder value rather than shareholder value. Then came graduation, which led to managing Kmarts for a few years (yes really – but their stock was at 28, though I doubt my leaving had much to do with the drop to 5 and 3/8), and then went back to the nest to get an MBA.

In graduate business school (circa 1993) there weren’t sector specific programs for MBAs to pursue in social entrepreneurship. Instead, it was the Capital Asset Pricing Model, Option Puts, decision trees, and way too many professors who had never worked a day in the real world and took their revenge on students by making them buy their books and stressing that the sole purpose of any corporation is to maximize shareholder wealth. BLEH!

Luckily, the Frank Hawkins Kenan Institute for Private Enterprise and Dr. Jim Johnson were leading the way in putting business skills into community economic development organizations, and I left B-school for the promise land of North Carolina. That was 1995….Now, thankfully, there are under/graduate programs with a social entrepreneurship bent everywhere!

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I was just cleaning up my hard drive and came across a file on social entrepreneurship that is worth sharing. A while back I was working at TROSA which is one of the best social entrepreneurs around. As a nonprofit, they earned almost 90% of their $6M annual budget. An amazing organization. I was obsessed with the Roberts Enterprise Development Foundation box set, and put it to use every day. I was also working with domestic violence shelters across North Carolina to help shelters determine if launching a thrift shop or entrepreneurial venture was a good idea.

Here are some great links to all things social entrepreneurial. I’m not as into social entrepreneurship as before, having moved along to focusing more on Social Return On Investment (SROI), but wanted to at least share these links. More on SROI in another posting (yes… you can hardly wait…..)…..

The Roberts Enterprise Development Fund
This is a Foundation dedicated to developing and studying innovative approaches to social issues. This is one of the best sources for the latest information on social enterprise development.

also see:
The Foundation’s Publications are AMAZING. If you are on the Board or staff of a domestic violence shelter and you are thinking of starting a thrift shop – read some of these publications PRIOR to launching that shop!

also see:
REDF Links Page which provides an exhaustive list of contacts and information on social entrepreneurship

HOW TO: Social Entrepreneurship
Authenticity Consulting’s “Social Entrepreneurship” page. Unbelievably relevant and useful!

Community Wealth Ventures, Inc.
A consulting firm that assists in all aspects of entrepreneurial wealth creation for the social sector. Community Wealth is a social enterprise, a for-profit subsidiary of Share Our Strength.

Echoing Green
Foundation providing seed money and technical support to individuals starting new public service ventures

Ashoka
Nonprofit investing in social entrepreneurs throughout the world.