entr4800 class 6 (part 2): legal considerations for social enterprise

ENTR 4800: Social Entrepreneurship

Class 6 (Part 2): Legal Considerations

Monday, October 25, 2010

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Instructors: Norm Tasevski ([email protected])

Karim Harji ([email protected])

© Norm Tasevski & Karim Harji

Agenda

•  After the break… •  Legal forms applicable to social enterprise •  Who sets the rules? •  Legal Innovations •  What did we learn – today? •  Next week

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A Caveat…

There is no defined (national or provincial) legal form for social enterprise in Canada

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A Second Caveat…

Form follows function

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Legal Forms Applicable to Social Enterprise…

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For-Profit Corporation!

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Non-Profit Corporation!

Charity!Partnership!

Sole Proprietorship!

Co-Operative Corporation!


For-Profit Corporation!•  Incorporated under the Business Corporations Act (Ontario) (the “OBCA”)

or the Canada Business Corporations Act (federal) (the “CBCA”)!•  With share capital!

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•  Most flex in terms of profit-making activities!

•  Can access all forms of investment (debt, equity, etc)!

•  Provides clarity of purpose (i.e. the financial bottom line)!

•  Limited personal liability!

•  Pay corporate tax!•  Cannot access grants!•  Cultural/

psychological barriers with operating a “for-profit social business”!


Charity!•  Incorporated via Letters Patent under the Corporations Act (Ontario) or

Canada Corporations Act (federal)!•  Without share capital!

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•  Don’t pay corporate tax on earnings!

•  Can issue tax receipts!

•  Can access many government/foundation/corporate grants!

•  Least flex in terms of profit-making activities!

•  Limited in the types of investments you can access (e.g. equity)!

•  Time-consuming!!•  Psychological barriers

with operating a “social business”!

•  An aversion to “risk taking”!

•  Can lose status if “too successful”!


Sole Proprietorship!•  Registered via Business Names Act (Ontario) or Canada Corporations Act

(federal)!•  Without share capital!

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•  The simplest (and quickest) legal form!

•  You have full control of business decisions!

•  Flexibility to make business decisions quickly!

•  No separate filing for income tax!

•  Unlimited liability!!!•  The business is the

entrepreneur!•  Hard to find investors!•  Limited creative input

(i.e. you’re the only one with ideas!)!

•  Less “professional” than other forms!


Non-Profit Corporation!•  Incorporated via Letters Patent under Corporations Act (Ontario) or Canada

Corporations Act (Federal)!•  Generally without share capital!

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•  Can access grants!•  Can access debt

financing!•  Tax exempt as long

as organized and operated for defined social/community benefit!

•  Some NPs are more open to (limited) risk-taking!

•  Can’t issue tax receipts!

•  Limited in the types of investments you can access (e.g. equity)!

•  Psychological barriers with operating a “social business” !

•  Can lose status if “too successful”!


Partnership!•  Registered under the Partnerships Act (Ontario)!•  With or without share capital!•  Usually organized using a Partnership Agreement!

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•  Similar benefits to sole proprietorship!

•  Combines skills/competencies of two people!

•  Can sign contracts and borrow money in its own right!

•  For most partnerships, unlimited liability! (at least in Canada…)!

•  Acrimony between partners is common!

•  Difficult to find investors!


Co-Operative Corporation!•  Incorporated under the Co-Operative Corporations Act (Ontario) or Canada

Cooperatives Act (Federal)!•  Wither with or without share capital!

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•  Well-established structures!

•  Integrates the concept of “community benefit” already!

•  Cannot issue tax receipts!

•  Generally not exempt from paying tax!

•  Psychological barriers with operating a “social business”!

•  Difficulty making decisions (too many people at the table)!


Exercise: Which legal form makes sense for…!

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Exercise: Which legal form makes sense for…!

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Your venture???!

Who sets the rules?…

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Specifically…


CRA Guidelines

•  Direction (law, regulations, guidelines, precedents) around social enterprise are not completely clear

•  Community economic development (CED)-specific exemptions: –  Relief of unemployment: training business. –  Relief of poverty through operating stores: business that

provides low-cost necessities. –  Relief of people with disabilities: “social business.” –  Relieving suffering in economically challenged

communities

•  Federal view of the business activity may differ from any provincial position

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An Evolving Conversation…

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Hybrid Structures

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Talk to a Lawyer!

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Legal Innovations…

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Legal Innovation: CIC (UK)

•  Established to trade (goods or services) for the community good

•  Requires “community interest statement” application to the CIC Regulator. Publically-available annual reports required to confirm (adherence to) community interest requirement

•  May issue shares in order to raise capital •  Cap on returns (dividends paid) set by the Regulator •  Subject to an “asset lock”

–  Assets and profits must be permanently retained by the CICs for community benefit, or transferred to another CIC subject to an asset lock, or to a charity

•  Taxed in the same manner as other businesses

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Legal Innovation: L3C (US)

•  Variation on American Limited Liability Companies (LLCs) •  LLC investors are members rather than shareholders •  Terms of the operating agreement guarantee the public

benefit nature of the entity’s work •  Like LLCs, L3Cs are not subject to federal income tax

themselves, but the income they pay to members is taxable according to the rates applicable to each member

•  Able to attract private capital through the sale of shares and other securities, various forms of loans, or other commercial financial arrangements.

•  Ability to receive Program Related Investments from foundations

•  No asset lock and no dividend cap

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Legal Innovation: B Corp (US)

•  To be certified as a B corporation under the B Lab system, the corporation must: –  Achieve a minimum score of

80 (out of 200) on the B Ratings System, a tool to assess a company's social and environmental performance.

–  Agree to make legal changes to its articles of incorporation to expand the responsibilities of the company to include consideration of stakeholder interests.

–  Pay B Lab an annual licensing fee.

–  Recertification is required every two years.

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Summary: Key Questions

•  Is the venture’s primary mission mostly social or profit? •  What are the founders’ views, skills, motives, and

intentions? How closely held is the organization? •  What is the market for the primary activities (goods/

services)? •  How much money is needed and where will you get it? •  What level of risk and liability is your organization willing

to take?

•  What will be the relationship between the enterprise and the parent organization? Will the enterprise be a separate entity? What is the governance structure of the enterprise (separately and in relation to the parent organization)?

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What did we learn?

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For your projects…

Clearly identify the following: –  Your legal form and why you chose it –  How it aligns with your proposed revenue stream(s) and

investment sources –  How it aligns with your plans for growth –  How it balances the financial and social considerations

and motivations for your venture

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Next Week

•  Guest speakers: –  Serge Levert-Chaisson - Sarona Asset Management –  Adam Spence - Social Venture Exchange (SVX)

•  Deliverable: Assessment of Business Potential

•  Readings: Impact Investing and Social Capital Markets

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References

•  “The Canadian Social Enterprise Guide, 2nd Edition”, Chapter 7 (The Legal Context), by the Enterprising Nonprofits Program

•  “Legislative Innovations and Social Enterprise: Structural Lessons for Canada” by Richard Bridge and Stacey Corriveau

•  “The Fine Print: Vital Information for Canadian Charities Operating Social Enterprises” by Stacey Corriveau

•  “Canadian Registered Charities: Business Activities and Social Enterprise – Thinking Outside the Box” by Terrance Carter and Theresa Man

•  “Social Enterprise: Choosing a Legal Form for your Social Enterprise,” by the Business Link Business Service Centre and Western Economic Diversification Canada

•  “Legislative Innovations” by William Chung, Mark Convery, Kerri Golden and Allyson Hewitt, MaRS Discovery District

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