Summary of “What Should the Law of Social Enterprises Be?”

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We had another great Talk last month, co-hosted by the American University College of Law. This event built off of our November Talk, co-hosted with DC Net Impact, on the definition of social enterprise, with this one focusing on social enterprise law. The discussion centered on local laws regarding social enterprise–the recently-enacted DC benefit corporation legislation, as well as similar legislation in Maryland. A full summary of the discussion is below.

This week we had another Talk, co-hosted by SPACIOUS, and next month we’ll have yet another one, co-hosted by our friends at Reach Inc. They just keep coming! Look for a summary of the SPACIOUS event soon, and more information on Reach Inc Talk in the coming weeks.

Summary of “What Should the Law of Social Enterprises Be?”

  • The ever-present question arose once again: “What is social?” Some participants were concerned about the implications that allowing an organization to incorporate as a “social” enterprise vs. a “non-social” enterprise could create. For example, if a “social enterprise” focuses on improving its supply chain, but pays its employees poor wages, can it be considered a social enterprise? If it provides necessary goods and services to impoverished communities, but stagnates the local economy, should that be considered a “social enterprise”?
  • There was some discussion of the fact that currently there aren’t tax benefits to being a social enterprise, but that these benefits (and others like the ability to get grants or contracts previously reserved for nonprofits) are one of the big things being discussed right now. Some had opinions on whether such benefits were good or bad, but all agreed these tax benefits would change the terms of the discussion about what the law of social enterprises should be.
  • There was some skepticism about whether new social enterprise legal forms are what is really needed, or whether it would be better to reform corporate law. But there was also optimism about social enterprises, generally, whether or not the legal forms are necessary.
  • Generally, people agreed that there is some marketing motivating that goes into incorporating as a benefit corporation. Some thought that regardless of the legal structure, the market would support true social enterprises in the long run and prevent those just interested in marketing as such from growing too large.
  • For this market mechanism, to work, however, there is the need for transparency in activities and impact, as defined through standards created by third-party evaluators. However, this need for standards can also hinder ingenuity and creativity within social enterprises, especially if a traditional business is trying to make the shift to a social enterprise.
  • There was some desire to improve the existing benefit corporation legislation. For example, it was pointed out that business structures like LLCs currently cannot be benefit corporations in Maryland, and that there’s no reason for that restriction.
  • There was a general desire to understand the impact the benefit corporation laws will have, both for specific enterprises and for a more general paradigm shift in the business community, but some strong sense that the jury is still out on whether benefit corporations will be an important phenomenon or not.
  • It was recommended to look and see if, historically, there had been other organizational forms that had been introduced with fanfare, only to not live up to their potential to create value. If there are cases of this happening, we could potentially learn some lessons from this to strengthen the benefit corporation movement.
  • Dan

    If social enterprises want the tax benefits, why not just incorporate as a nonprofit? It isn’t that difficult and the annual 990 filing is easily completed. Or, incorporate the nonprofit and run the social enterprise within it and pay UBIT as necessary.

    The important thing- and this is really important- is that excess profit in the nonprofit organization goes back to the organization, not a shareholder or owner. This doesn’t mean you can’t make money (plenty of people at nonprofits make more than enough money) but it is the price you pay for the tax benefit. That, and you must have a board, but that isn’t very different from shareholders.

    I have to say that much of the legal social enterprise debate seems to be a solution in search of a problem. What public corporation has ever been sued for running a corporate giving program or contributing to a corporate foundation?

    • http://www.unsectored.net Jeff Raderstrong

      Thanks for reading! I think that you make a good point, but I would say that there are some restrictions on becoming a nonprofit that might make a for-profit model more attractive. Waiting for the IRS to grant status does take time, and starting a for-profit benefit corporation can be much quicker.

      Also, as our blogger Mark Hecker says in this post, http://www.unsectored.net/sustainable-non-profit/, for-profit models can grow much quicker than nonprofit counterparts, assuming they are a good model to start. While there are concerns with the benefit corporation model, as illustrated in this post, I generally don’t see an issue with giving individuals more choices for institutional models.