Wikipedia defines a “social enterprise” as “any for-profit or non-profit organization that applies capitalistic strategies to achieving philanthropic goals.” The concept has been getting quite a bit of attention recently–without a doubt, for good reasons. Within the past few years, the Low Profit Limited Liability Company (“L3C”) and the Benefit Corporation (“B Corp.”) have arisen as sort of quasi entity classifications to allow social enterprises to distinguish themselves in a formal manner from their more profit-focused counterparts. We’ve been getting questions about them, so…here’s what they are, and more importantly, what they’re not.
A number of states have enacted L3C statutes, although Ohio is not one of them. L3C entities are similar to LLCs but have certain features which attempt to make them more attractive to private foundations seeking to make an investment. In order to maintain its charitable (tax-free) status, a private foundation must disburse much of its profit each year. But, if a private foundation makes a qualifying investment related to the foundation’s purpose, then the investment will count toward the annual distribution and will not jeopardize the foundation’s charitable purpose. However, the private foundation must bear significant costs to ensure that an investment meets IRS requirements (usually by seeking a private letter ruling from the IRS). The L3C entity is designed to remedy this problem by baking the IRS’s requirements for a qualifying investment directly into the authorizing statute, thereby eliminating the need for a private letter ruling. So, theoretically, an L3C should be more attractive to private foundations because the foundation will have lower investigation costs associated with making the investment.
Unfortunately, the IRS has not formally recognized L3C status as meeting its requirements (and there has been no indication that they will do so in the near future). The concept is great–enabling private foundations to more efficiently invest in social enterprises would certainly enable a number of very noble causes to gain funding. But unless and until the IRS does formally recognize the L3C, the benefits may amount to little more than branding, especially since any associated governance provisions can be included in the Operating Agreement of a normal LLC.
First, a B Corporation is not an entity in its own right (except in Maryland and Vermont, where a company can incorporate as a state-sanctioned entity known as a Benefit Corp). It is a certification offered by a third party—B Lab. To be certified as a B Corporation, your company must agree to take on additional corporate responsibilities. These responsibilities include redefining the best interests of the corporation to include the consideration of employees, consumers, the community, and the environment. The certification process involves several steps and requires that specific language be included in your company’s governing documents. In addition to goodwill in the community, certification may help attract funding from socially conscious investors and may entitle the company to certain tax breaks (for example, in 2009 Philadelphia created a tax break for B Corporations).
For the most part, if you want to put any of these provisions in your governing articles to better define your social enterprise, you can do so without paying for a B Corporation certification. And incorporating as a B-corp in one of the states that allow it may in fact create legal costs down the line as investors and other parties who you’ll do business with will have to get comfortable with the entity. That said, though, a B-corp certification, for the right organization, could be a very important branding tool, both internally and externally.