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Transcript of Social Entrepreneurship
William S. Boyd School of Law
Small Business & Non-Profit Legal Clinic
Social entrepreneurship is the process of pursuing innovative solutions to social problems.
Social entrepreneurs develop concepts from the business and non-profit worlds and operate in a variety of organizations: large and small; new and old; religious and secular; non-profit, for-profit.
What It Isn't
In contrast to business entrepreneurs who measure success in economic terms, social entrepreneurs measure success in terms of positive social change.
What Legal Structure?
We want to leave you with the following:
A strong understanding of what social entrepreneurship is, and more specifically, what a benefit corporation is;
The importance of entity selection and the reasons for selecting a Benefit Corp; and
How to form a Benefit Corp and how it differs from a C-Corp.
Why It Matters
A chance to change the face of business
Develop social solutions and profits
Implement change on a large scale
Early in the planning stages of the venture, social entrepreneurs should consider the following questions:
Who are the founders of the organization and what is their expectation in terms of ownership of the organization?
What is your social purpose (What problem are you trying to solve)?
What social impact do you want to achieve and how will you measure it?
What is your business plan and how will it address the problem you are trying solve?
Will you rely on grants and donations or other subsidies for regular operations?
Is it important for your public image to be a particular type of entity (non-profit, co-op, benefit corporation, etc.)?
Where will you get your start-up and ongoing funding?
Who are your investors/shareholders?
Who are your beneficiaries/customers/stakeholders?
Who will control and manage the organization?
What are your personal and financial goals for this organization?
How long do you intend the organization to exist and what is your exit strategy (for yourself and for investors)?
The best legal vehicle for a social entrepreneur is one that not only allows private ownership and investment but can also receive program-related investments and charitable contributions.
Corporations & LLCs
What is the meaning of limited liability?
A Limited Liability Company is the most flexible structure for social entrepreneurs who want limited liability, flow-through tax treatment, and potentially, future investment.
An LLC offers limited liability without the mandate to generate profits for shareholders.
Flexible entity - allows you to contract for whatever you want in your Operating Agreement.
A "person" separate from its owners
Annual reports, annual meetings, maintenance of records, require shareholder approval for certain actions
What is it?
Moral goals and benefits
More than financial goals
Benefit v. C-Corp.
Share common corporate structures
Filing of an annual report
Maintaining corporate formalities
Maintenance of corporate records
Certain actions require board/shareholder approval
Benefit Corps have an additional layer of standards:
Require an annual third-party standard review
Must select a benefit purpose
More on these later
A benefit corp
have a "specific public benefit"
A benefit corp
have a "general public benefit"
A benefit corp must have a third-party assessment
Annual Report is filed with Secretary of State but B-Corp must distribute Benefit Report to all shareholders and/or post the report on their website.
B-Corp or Benefit Corp
What is a B-Corp?
Benefit corporation is a LEGAL ENTITY
B-Corp is a certification conferred by the non-profit B-Labs
Can be both, or just get B-Corp certification
The purpose is really for marketing
A certification process
A company must reach a verified score of 80 out of 200
Requires publishing an annual report of benefit activity
An LLC and a C-Corp can be certified
1) Creates a material positive impact on society
2) Expands fiduciary duty to require consideration of non-financial interests when making decisions
3) Reports on its overall social and/or environmental performance using
third party standards
A Benefit Corp provides directors with legal justification to consider social and environmental missions over financial goals.
Started as a C-corporation, but wanted to communicate that maximizing shareholder profits was not its top priority
The main parts that are required in order to comply as a benefit corporation:
(1) A benefit corporation must declare its commitment.
Nevada requires a "General Public Benefit"
The main difference is that Benefit Corporations are legally required to be a positive instrument for social change.
You, as the corporation, select the assessor
The assessor looks for the sufficiency of the selected purpose in terms of satisfying the “general public benefit” requirement
Benefit corporation legislation does not require a benefit corporation to use any particular third-party standard to prepare its annual benefit report
Legislation does not require the report to be certified or audited by a third party
NRS 78B.080 “Third-party standard” defined
“Third-party standard” means a standard for defining, reporting and assessing overall corporate, social, and environmental performance:
1. That provides for a comprehensive assessment of the impact of the benefit corporation…;
2. That is developed by an entity that … has no material financial relationship with the benefit corporation …; accesses necessary and appropriate expertise to assess overall corporate social and environmental performance; and … uses a balanced, multi-stakeholder approach to develop the standard, including, without limitation, a public comment period of at least 30 days….
Starting or Switching to a Benefit Corporation
• NRS 78B.140 Creation of general and specific public benefits; required and optional provisions of articles of incorporation.
(1) A benefit corporation shall have the purpose of creating general public benefit . . .
(3) The creation of general and specific public benefits as provided in subsections 1 and 2 is in the best interests of the benefit corporation.
• NRS 78B.040 “General public benefit”
“General public benefit” means a material positive impact on society and the environment, taken as a whole, as assessed against a third-party standard, from the business and operations of a benefit corporation.
1) Creates a material positive impact on society and the environment;
2) Expands fiduciary duties to require consideration of non-financial interests when making decisions; and
3) Reports on its overall social and environmental performance using third-party standards.
Need Articles of Incorporation:
Name of corporation
Authorized stock amount
Members of the board
Must declare benefit corp status
Preparation of a benefit report: The benefit report must assess the corporation's operations against a third-party standard.
The benefit report must be:
distributed to shareholders;
made publicly available; and
posted on the website or mailed to shareholders
Report Should Contain:
A Narrative description of:
Process for selecting third-party standard;
Ways in which company pursued its public benefit;
Ways in which the company pursued specific purpose; and
Any circumstances that hindered pursuit.
Assessment MUST be consistent with original application or explained why it is not consistent
(1) Complete the "Certificate to Accompany Restate Articles" or "Amended and Restated Articles to Amend Articles of Incorporation" found online and submit the appropriate form to the Secretary of State;
(2) Include a corporate purpose to create general public benefit, and any specific benefit when applicable; and
(3) The decision to amend articles of incorporation is contingent upon a two-thirds minimum vote by the board of directors and shareholders (legal advisement may be required).
So why not a Non-Profit?
You can provide positive social benefits with a C-Corp
Business Judgment Rule: Directors are presumed to act in good faith
Constituency Statute: state directors are empowered to balance the interest in the way that their good conscience or good faith decisions would dictate
You select a business entity for several reasons:
Benefit Enforcement Proceeding
What happens when a Benefit Corporation fails?
Who can bring suit?
What are the remedies?
No case law.
Duty of Care:
requires that each member of the board of directors, when performing the duties of a director,
act in good faith
and in a manner the director
reasonably believes to be in the best interests of the corporation
, and with the care that an
ordinarily prudent person
would reasonably be expected to exercise in a like position and under similar circumstances
Duty of Loyalty:
requires that directors put interests of the corporation ahead of their own interests.
Conflict of interest and self-dealing transactions trigger the duty of loyalty
General Public Benefit
Helping low-income people
Providing economic opportunity (besides job creation)
Preserving or restoring the environment
Improving human health
Promotion of the arts and sciences
Increasing the flow of capital to entities with a general public benefit purpose
The accomplishment of any other particular benefit for society or the environment
Specific Benefit Examples