Educating Social Entrepreneurs, Volume II

Paul Miesing, Maria Aggestam

• Publisher: Business Expert Press
• Year: 2017
• Print ISBN: 9781631578977
• eBook ISBN: 9781631578984
• Topic: Business
• Subtopic: Management
• Index: Business

Educating Social Entrepreneurs: From Business Plan Formulation to Implementation appears at a time of unprecedented environmental disasters, natural resources depletion, and significant failure of governments and global businesses to attend to worldwide social problems. In this era of downsizing, restructuring, and social changes, notions of traditional venture creation and the ways of creating social values have been challenged. We draw on examples from various parts of the business world and societies to prepare students, scholars, and entrepreneurial managers to deal with the challenges presented by a new and diverse business environment to create business plan for a social venture. Illuminating troublesome aspects of the global social and business worlds, this workbook comprises two volumes that covers key issues. Students, scholars, and entrepreneurs who want to help a world of multiple disparities by dealing with social entrepreneurship will find this to be beneficial reading.

PART IV

Organizational Structures and Hybrid Organizations for Social Enterprises

CHAPTER 17

Legal Structures Available to Social Enterprises: An Overview

Helen Takacs

Dickinson College

Introduction

An early challenge for social entrepreneurs is deciding on the most appropriate legal structure for the venture. The choice of a legal structure is critical for a variety of reasons including issues related to growth, liability, taxation, and longevity. Research has long shown that business planning activities, such as choosing a legal structure for an organization, are challenging for entrepreneurs, who often focus more on the creative nature of their work than on practical aspects (Khandekar and Young 1985). This would seem to hold true for social entrepreneurs. This chapter provides an overview to the various legal structures available to social enterprises and notes the benefits and limitations of choosing one legal form over another.

Country-specific and, in several countries, state-specific legal frameworks determine the variety of legal structures available to social entrepreneurs. In a 2011 study of global social entrepreneurship (Terjesen et al. 2011), three broad categories of legal structures were considered: for-profit, not-for-profit, and hybrid. In all regions of the world except the United States, the most common legal structure for social enterprises is a hybrid structure, and the not-for-profit structure is the second most common. This relationship is reversed in the United States where the not-for-profit structure is most common, followed by the hybrid structure. This chapter is organized into these same three broad categories: for-profit structures, which include the company model and cooperatives; not-for-profit structures; and hybrid structures. There are several legal forms within each category, and each legal form has a unique mix of characteristics that could present opportunities or challenges to the social entrepreneur.

Five characteristics of the legal structures should be considered by social entrepreneurs. The first is the level of complexity and expense to set up the organization. The second characteristic relates to liability issues and the extent to which the organization’s founders are liable for any damages caused by or debts taken on by the organization. The third characteristic concerns the funding options that are available to the organization, which, in turn, affects an organization’s ability to grow and scale up. How taxes are computed on any income earned by the organization constitutes the fourth characteristic. The final characteristic is the possible longevity of the organization and the dispersion of assets upon dissolution. For social enterprises, the choice of a legal structure is also an opportunity to signal to the broader community that the organization has a social mission.

Regardless of the legal form that an organization adopts, it is possible in some countries to integrate and signal a social mission by seeking legal status or a mark or certification as a social enterprise. Legal status as a social enterprise is a governmental recognition that an organization has adopted a social purpose. A mark or certification is a third-party, nongovernmental “seal of approval” administered and managed by a not-for-profit-certifying organization. B Corp certification, which is issued by the American not-for-profit B Lab, is sometimes confused with the benefit corporation, a hybrid legal structure. To address this confusion, social enterprise legal status, marks, and certification are included in this chapter on legal structures. The chapter concludes with a set of questions to help readers better understand legal structures that are specific to their jurisdiction.

Legal Structures Available to Social Enterprises

Legal structures available to social enterprises can be organized into three general categories: for-profit structures, not-for-profit structures, and hybrid structures. Hybrid structures are legal forms of organizing that have been created in several countries and that combine characteristics of for-profit and not-for-profit structures. These hybrid structures have been developed specifically for social enterprises. In addition to legal structures, social entrepreneurs may seek legal status as a social enterprise or a social enterprise mark or certification. This section provides a global overview to assist social entrepreneurs as they navigate the decision regarding legal structure.

1. For-profit structures available to social enterprises

Sole Proprietors

In ventures structured as sole proprietors or sole traders, there is one owner, and the owner and the organization are the same under the law (Nickels et al. 2015). Thus, the owner bears full responsibility and liability for the company. Any profits or losses are taxed as personal income or loss for the owner, which is referred to as pass-through taxation. A sole proprietorship ceases to exist when the owner dies or sells the assets of the company. A sole proprietorship cannot be transferred to another individual or organization.

Sole proprietorships are the least complex and least costly form of business to set up. In the United States (U.S. Small Business Administration undated, a) and Australia (Australian Government undated), for example, the legal process for setting up a sole proprietorship requires just two steps. The first is to choose a business name, which involves searching to ensure that the chosen name is unique and is not already trademarked. If the business name is different from the legal name of the business owner, the business owner must register the name or file a fictitious name form. As an example, if Myra Thompson opens a tax service named Myra Thompson’s Recycling Center, she does not need to file a fictitious name form. She would need to check, though, if there is another business in her state with that name. If Myra Thompson chooses to name her company the Best Tax Service, she would need to both search to ensure that no other company has that name and file a fictitious name form. The second step for setting up a sole proprietorship involves obtaining the necessary permits, licenses, and zoning clearances.

An optional step for sole proprietorships, but one that may be required if the company has employees, is to obtain an Employer Identification Number (EIN) in the United States or an Australian Business Number (ABN) in Australia. If the company has no employees, a sole proprietor can file taxes under the owner’s social security number or tax file number. The profits or losses of a sole proprietorship are taxed as personal income. There are no annual filing requirements other than the owner’s personal tax return, which is another aspect of simplicity associated with this business form.

Funds available to a sole proprietorship are the owner’s personal savings, credit card debt, and money that the owner is able to borrow from banks and from family and friends. A sole proprietor cannot raise funds by selling ownership, or equity, in the firm. Thus, sole proprietorships often have difficulty in raising large sums of money for the business.

In a sole proprietorship, the owner has complete control of the business. The owner has the freedom to make all management decisions. Often, though, the owner acts on limited knowledge regarding some business decisions. Returning to our example, Myra Thompson may be highly knowledgeable and able to make competent and informed decisions about recycling processes. But, unless she also has education or experience in the area of marketing, she may not be able to effectively market her company and develop a growing customer base. Because managing a business, even a small one, is complex and requires knowledge in many different areas, sole proprietorships can be at a disadvantage in terms of managerial expertise.

Partnership

A partnership is a legal form of business in which there is more than one owner, or partner (Nickels et al. 2015). There are two basic forms of business partnerships. In the first, the general partnership, all partners share in the liability and decision-making of the company. In the second, limited partnerships, there will be one or more general partners who assume full liability and decision-making authority for the company, and the remaining partners are limited partners. The liability of limited partners is capped at their financial investment in the company, and limited partners usually refrain from participating in day-to-day operations and decisions.

Partnerships are relatively easy to set up (Morrison and Foerster, undated; Gov.UK, undated). The owners draft and sign a partnership agreement that addresses several issues including the management responsibilities and financial contributions of each partner, the term of the partnership, provisions should a partner die or otherwise choose to leave the partnership, and how profits and losses will be shared among the partners.

Partnerships, by their very structure in which there are multiple owners, make possible both greater knowledge and greater financial resources for the company than for sole proprietorships. The partnership can be comprised of individuals with different backgrounds and knowledge bases, which improves decision-making in the organization. And, the partnership can use the funding to which all partners have access. The issue of liability, even when it is limited, often precludes investors from getting involved in a partnership when they are scouting investment opportunities. Thus, it may be difficult for partnerships to raise large sums of money.

Similar to sole proprietorships, general and limited partnerships have pass-through taxation. Profits or losses are reported and taxed on the individual partner’s tax return.

Corporation

A corporation, or share company, is a legal entity under the law and is distinct from its owners, who are the company’s stockholders (Morrison and Foerster, undated; Nickels et al. 2015). The corporation assumes unlimited liability, and owners’ risk is capped at the amount of their investment in the company’s stocks. Formation of a corporation can be costly, complex, and time-consuming. Articles of incorporation must be filed with the government and stock must be issued. Private corporations sell their shares privately, and public corporations sell their shares to the general public through a stock market exchange. Expenses associated with setting up a corporation include filing fees and attorney fees. Additional, and substantial, expenses are incurred if and when a corporation goes public.

In sole proprietorships and most partnerships, the owners are also the managers. In corporations, the owners elect a board of directors to oversee the company. And, the board of directors hires professional man...

Table of contents

• Cover
• Half-title Page
• Title Page
• Copyright
• Abstract
• Contents
• Introduction
• Part IV Organizational Structures and Hybrid Organizations for Social Enterprises
• Part V Mobilizing Resources to Fund Social Ventures
• Part VI Scaling the Social Venture
• Part VII Ecopreneuring as Social Enterprises
• Resources
• Author the Authors
• Additional Readings
• Index
• Announcing the Business Expert Press Digital Library
• Backcover