Choosing a Legal Structure for Your Social Enterprise
At Catalyst Law, we define a “social enterprise” as any organization that has elements of “doing well financially by doing good.” Under this definition, social enterprises can take many forms – from strictly for-profit businesses to nonprofit organizations, with several options in between. This six-part series will describe many of the options available for structuring a social enterprise. Get in touch with us today if you would like to discuss your individual goals and circumstances.
Structuring a Social Enterprise: For-Profit Options
This installment in our six-part series will examine options for forming a for-profit social enterprise.
Sole Proprietorship: No entity distinct from the individual owner of the business.
- The owner of the company is 100% personally liable for the debts and obligations of the business.
- Limited options for raising capital, which is likely tied to owner’s credit score.
- Owner retains flexibility and control with little-to-no formal formation or reporting requirements.
Classic Examples: Freelancer/ independent contractor.
Partnership: A company owned by two or more partners, each of whom provide capital, assets, sweat equity, and/or labor, and in return, receive a share of the profit and/or losses of the business.
- Several types of partnerships exist, each of which offer various levels of liability protections for the owners.
- In a General Partnership, all partners are “General Partners”, and have equal management authority with unlimited liability for all debts and obligations of the business.
- In a Limited Partnership, some partners are General Partners, responsible for the daily operations of the company. Other partners are Limited Partners, and provide only financial investment for the company. Limited Partners are not liable for the debts and obligations of the business.
Classic Examples: Traditionally, law firms, architectural firms, and medical practices have used general partnership structures, but this is changing. Real-estate or film-production companies typically utilize limited partnerships.
Corporation: A for-profit business owned by one or more shareholders and governed by a Board of Directors. Shares may be separated into separate classes, with each class of shares having different voting and other rights.
- Generally, the Board of Directors is legally required to maximize profit (shareholder value), without regard to social or environmental impact.
- May be best suited for raising capital (thereby most likely to attract investment funds).
Classic Examples: Coca-Cola, IBM, General Motors
Limited Liability Company (LLC): A for-profit entity, usually with a pass through tax structure, typically comprised of a single owner or a small group of private owners.
- Generally the favored entity choice for closely held companies, since investors potential liability is limited to the amount invested.
- Pass-through taxation of LLCs can be highly beneficial for some investors, yet problematic for others, depending on the individual circumstances of each investor.
- Flexibility of LLC governing documents allow for inclusion of social mission and requirement of management to consider social and environmental impact when making business decisions.
Classic Examples: Many small, family-owned businesses, but some grow large – Koch Industries, Cargill, Chrysler LLC
Make sure you sign up for our email newsletter because in Part II of the Social Enterprise Structure Series, we will explore non-profit options for social enterprise.