Eric Davis' Presentation about Social Enterprise from CMU's Start Smart Program

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Social Enterprise
Eric Davis
Managing Partner
Elliott & Davis, PC
http://www.elliott-davis.com

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So, What is a Social Enterprise?
“A mission-driven entity which applies market-based
strategies to achieve a financial, social and/or
environmental purpose, thereby building a more just,
sustainable world. Their aim- to build value that is social
and/or environmental as well as financial- is often referred
to as the triple bottom line. Many commercial businesses
would consider themselves to have social objectives, but
social enterprises are distinctive in that their social or
environmental purpose remains central to their operation.”
-Kyle Westaway
www.socentlaw.com

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Social Enterprises vs.
Nonprofits & For Profits
 Two traditional types of basic entities:
Nonprofit and For Profit.
 Social Enterprises such as Benefit Corporations, Flexible
Purpose Corporations and LC3s, are a blend of the two.
 California, Hawaii, Maryland, New Jersey, Vermont, Virginia and
New York have benefit corporation statutes.
 Benefit Corporations, Flexible Purpose Corporations or LC3s DO
NOT exist in Pennsylvania.
 Might become an option in Pennsylvania in 2013.

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 Do something positive
with your
professional/working life.
 Customers consider social
Why Should I Form and environmental impact
a Social Enterprise? when making purchasing
decisions.
 Novel enough to be really
attractive to
investors/capital.

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Social Enterprises in Pennsylvania
Seek B-Corp Certification
(www.bcorporation.net)
 Voluntary Certification, NOT Legal
Structure
 Can Be Applied to Any Legal Structure
 Differentiates Good Companies from
Companies with Good Marketing/PR
 Periodic Assessment/Must Publish
Results
 Need to Score Better than 80/200 on
B-Labs Assessment
 Require addition of language to
Bylaws/Operating Agreement
 No difference in Tax Treatment

6. + What Entity is Right for Me?
LLCs are best for Social Enterprises
• Most flexible
• Least amount of filings.
• No required shareholders’ meeting.
• Pass through taxation treatment

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LLCs Formed for Social Enterprise:
What’s Different?
Needs: Management
 General/Special Public Benefit  Manager(s)/Management committee
“material positive impact on society and the must take benefit in account on all
environment, taken as a whole, assessed
against a third party standard, from the decisions
business and operations of a benefit
corporation”  Annual Assessment by third party
 Third Party Standard  Certificates of Membership Interests
Developed by a party not related to entity it’s Should Include Specific Language
measuring. Transparent in methodology.
 Reporting of Public Benefit Information
Taxes
Issue annual reports including records of  No favored tax status.
successes and failures for general and specific
public benefit (within 120 days after fiscal year + (May change some day)
must be publicly available)
Formation Raising Capital
 Certificate of Organization  No difference. Debt & Equity Financing is
Must state specific public benefit (like non-profit) OK
 Operating Agreement  Consider seeking Risk Capital from groups
Including public benefit purpose, management looking to fund social benefit aspects
duties and reporting of public benefit
information.
 Certificates of Membership
Should include specific language

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Benefit Corporation:
A New Class of Corporate Entity to Increase Transparency
and Accountability.
Needs: Formation
 General Public Benefit  Articles of Incorporation
“material positive impact on society and the Must state benefit corporation status and specific
environment, taken as a whole, assessed public benefit. (Similar to nonprofit)
against a third party standard, from the  Bylaws
business and operations of a benefit
corporation” Must include public benefit purpose,
management duties and reporting of public
 Third Party Standard
benefit information
Developed by a party not related to entity it’s  Stock Certificates/Shareholders
measuring. Transparent in methodology. Agreements
 Special Public Benefit
Should include specific language
 Providing individuals/communities with beneficial
products and services.
 Promoting economic opportunities for individuals Management
or communities beyond job creation and making  Directors must take benefit into account on all
money.
decisions.
 Promoting health or environmental preservation
 Annual assessment by third party
 Promoting arts and sciences.
 Some states require a benefit director (a good
 Reporting of Public Benefit Information idea in practice)
Issue annual reports including records of
successes and failures for general and specific Taxes
public benefit (within 120 days after fiscal year +  Subject to corporate tax on net income
must be publicly available)  Dividends are subjected to personal income tax
 No favored Tax Status (may change some day)

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Flexible Purpose Corporation
New Class of Corporation
 Allows Corporation to Pursue a Special
Purpose
 Protects Directors from Shareholder Suit

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LC3
New class of LLC
 Elevates charitable purpose over profit
 Allows a mix of philanthropic and private capital
Designed Specifically to get
Program Related Investment (PRI)
 Exception for organizations that have a charitable purpose.
 Gets around rules governing private foundations established by the
Tax Reform Act of 1969.
 Very Expensive.
(requires legal opinions and extra attachments to tax forms.)
 Used infrequently and usually only for large gifts.

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Examples
Big Idea Cooperative, LLC
The Big Idea is a cooperatively owned and operated radical bookstore that
provides literature that is multicultural, women-positive, queer-positive,
class-conscious, anti-militaristic, and that promotes a sustainable world and
community. The Big Idea also serves the community by providing a safe
space for all individuals to explore radical and alternative ideas.
Sponsor Change, LLC
SponsorChange.org provides non-profits with the means to recruit skilled
college graduates to complete service projects and raise funds from
sponsors to reward their work with student loan payments, helping both non-
profits and college graduates reach their full potential.

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Thank You! Questions?
Contact Us!
Elliott & Davis, PC
 eric@elliott-davis.com
 412.434.4991 ext 11
 www.elliott-davis.com
 www.incorporateinpa.com