Joe Johnson, Ph.D.
Entrepreneur. Investor. Startup Expert.
As you go about planning for your social enterprise, it’s essential that you make preparations for the new venture’s legal structure. While your business continues to grow, you need to take whatever time is necessary to ensure that all of your operations are in compliance with the law. As a beginning, consider these issues:
- Who founded the organization and will they be an ongoing part of its operations? Social enterprises can include silent founders who simply provide funding and expertise and are not involved in the day-to-day operations of the company. Moreover, a social enterprise may have multiple owners, including one or more from the location where the enterprise is operating.
- Do you have a business plan that clearly details your problem-solving strategy? Your founding document should clearly outline your organization’s hierarchy so that it’s a simple matter to determine individual responsibilities.
When you’re working as an entrepreneur in a commercial venture, the primary concern of the legal structure – beyond compliance with applicable laws – is ensuring that those individuals with a stake in the company are able to realize a profit. A commercial entrepreneur could conceivably face legal action when they fail to deliver on this concern, as it might indicate that their operating priorities are misplaced. In the case of a social enterprise, however, it’s possible to concentrate on other goals without solely focusing on profit, as the primary corporate motivation has more to do with fulfilling a social mission.
The Right Structure
As a social entrepreneur, your legal structure should take into consideration the fact that you have limited resources. You should be aware of possible benefits to be realized from tax liens, while also selecting a corporate structure which facilitates access to capital.
Social enterprises must look toward the future, not least with respect to their ability to receive investments, both profit-seeking and charitable. Social entrepreneurs can easily fit their endeavors within existing legal structures. Those best suited to this type of business include:
- Limited partnerships allow for a simple written agreement, thereby easing the process of describing each partner’s role and responsibilities.
- Corporations require more documentation to begin and to remain in operation. They do offer significant advantages, however, in separating company assets and liabilities from those of the principals’.
- Low Profit LLC (L3C) is a hybrid structure that bridges the gap between non-profit and for-profit entities. Its primary objective is to move a charity forward or increase the amount of education to people within a society. Although this type of company has a mandate to earn profits, the owners have minimal personal liability. They are able to receive investments from foundations geared toward private investors with philanthropic goals.
- Unincorporated Associations are also known as voluntary or community associations. This sort of social enterprise may be readily transitioned into a registered charity. It’s a good place to begin as a social enterprise, as it permits considerable room for growth.
The field of social enterprise legal structure is still evolving and currently encompasses a wide range of applicable laws, including those governing both for-profit and non-profit corporations, as well as associations. Be sure to also consider your tax situation (including qualified exemptions), as this is likely to be complex.
When deciding which social enterprise structure is most appropriate for your situation, you need to allocate sufficient research time. Following your research phase, take the information you’ve learned and consult with an attorney (and probably an accountant, too) and make your decisions carefully while bearing his advice in mind.
About the Author
Dr. Joe Johnson is an entrepreneur, investor, and startup expert. He is the founder and principal of GoodField Investments and the GoodField Foundation (www.GoodField.com).
Joe has a Ph.D. in Entrepreneurial Leadership and an MBA. He is the author of the upcoming book on The Science of Why Most Entrepreneurs Fail and Some Succeed.
Most importantly, he is the incredibly blessed husband of one amazing wife and father of six wonderful children. He resides in Bradenton, Florida. For more information on Dr. Johnson and his work, go to www.JoeJohnson.com.