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Which Legal Structure Is Right for My Social Enterprise? a Guide to Establishing a Social Enterprise in the United States

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Which Legal Structure Is Right for My Social Enterprise? a Guide to Establishing a Social Enterprise in the United States WHICH LEGAL STRUCTURE IS RIGHT FOR MY SOCIAL ENTERPRISE? A GUIDE TO ESTABLISHING A SOCIAL ENTERPRISE IN THE UNITED STATES REUTERS / KEVIN LAMARQUE ACKNOWLEDGEMENTS The Thomson Reuters Foundation is immensely grateful to Morrison & Foerster LLP for their dedication and the extensive resources they have provided in making this Guide possible. Their commitment to the social enterprise sector has paved the way in both the UK and the US for new ways of thinking in relation to how traditional corporate forms can be used or adapted to accommodate businesses that want to achieve social and environmental goals, in addition to the traditional maximization of profits. In particular, we would like to thank: SUSAN MAC CORMAC Partner SHANE SHELLEY Partner LINDA ARNSBARGER Of Counsel LISA ABBOT Associate JESSE FINFROCK Associate BENJAMIN FOX Associate KRISTIN HIENSCH Associate YING HUANG Associate JAMES KRENN Associate TEMIDAYO ODUSOLU Associate INGRID PFISTER Associate CLAIRE REILLY Associate ANA VINUEZA Summer Associate JEANNETTE FILIPPONE Former Associate SIMON MONT UC Berkeley School of Law, Class of 2016 We would also like to thank everyone else at Morrison & Foerster LLP who helped in the preparation of this Guide as well as the clients and entities who kindly agreed to participate as case studies. WHICH LEGAL STRUCTURE IS RIGHT FOR MY SOCIAL ENTERPRISE? A GUIDE TO ESTABLISHING A SOCIAL ENTERPRISE IN THE UNITED STATES DISCLAIMER Thomson Reuters Foundation and Morrison & Foerster LLP have created this Guide purely to inform and to assist its readers in learning more about registered social enterprises in the United States. However, Thomson Reuters Foundation and Morrison & Foerster LLP neither verify the accuracy of, nor assume liability for, the information within the Guide. The contents of this Guide are for information purposes and to provide an overview only. This Guide does not provide legal information on all corporate forms available and is current as at May 1, 2016 only. Although we hope and believe the handbook will be helpful as background material, we cannot warrant that it is accurate or complete, particularly as circumstances change after publication. This Guide is intended to convey only general information; therefore it may not be applicable in all situations and should not be relied or acted upon as legal advice. This Guide does not constitute legal advice and should not be relied on as such. Morrison & Foerster LLP renders legal advice only after compliance with certain procedures for accepting clients and when it is legally and ethically permissible to do so. Readers seeking to act upon any of the information contained in this Guide are urged to seek individual advice from legal counsel in relation to their specific circumstances. This Guide does not reflect the personal views of any of the attorneys or clients of Morrison & Foerster LLP or staff of the Thomson Reuters Foundation. Copyright © 2016 Morrison & Foerster LLP. All rights reserved. All copyright and other intellectual property rights in all text and other materials in this Guide are owned by Morrison & Foerster LLP or are included with permission of the relevant owner. You are permitted to browse the electronic version of this Guide and to print or download a copy to a hard disk. You are not permitted to reproduce, sell or distribute any part of this Guide for commercial purposes, nor shall it be modified or incorporated in any other work, publication or site. No other license or right is granted. All trademarks displayed in this Guide are either owned or used with permission by Morrison & Foerster LLP. WHICH LEGAL STRUCTURE IS RIGHT FOR MY SOCIAL ENTERPRISE? A GUIDE TO ESTABLISHING A SOCIAL ENTERPRISE IN THE UNITED STATES TABLE OF CONTENTS FOREWORD ................................................................................................................................................ 1 INTRODUCTION .......................................................................................................................................... 3 1. WHICH TYPE OF SOCIAL ENTERPRISE IS RIGHT FOR ME?..................................................... 7 2. LEGAL STRUCTURES AVAILABLE TO ALL ENTERPRISES ....................................................... 9 2.1 Sole Proprietorships ........................................................................................................... 9 2.2 Partnerships ..................................................................................................................... 17 2.3 Corporations..................................................................................................................... 32 2.4 Limited Liability Companies.............................................................................................. 46 3. LEGAL STRUCTURES SPECIFICALLY DESIGNED FOR SOCIAL ENTERPRISES ............................................................................................................................. 61 3.1 Social Purpose Corporation ............................................................................................. 64 3.2 Low-Profit Limited Liability Company (L3C) ..................................................................... 72 3.3 Benefit Corporation .......................................................................................................... 78 3.4 Cooperatives .................................................................................................................... 89 3.4 Hybrids ............................................................................................................................. 95 3.5 Delaware Public Benefit Corporation ............................................................................. 103 4. CERTIFICATIONS, RATINGS AND REPORTING SYSTEMS .................................................... 111 4.1 Overview ........................................................................................................................ 111 4.2 Costs and Documentation .............................................................................................. 114 4.3 Impact on Governance and Regulatory Obligations ....................................................... 115 4.4 Impact on Financing ....................................................................................................... 115 5. BIBLIOGRAPHY ......................................................................................................................... 117 5.1 Select Statutes ............................................................................................................... 117 5.2 IRS Tax Guides and Websites ....................................................................................... 117 5.3 Other Websites .............................................................................................................. 118 5.4 Select Forms .................................................................................................................. 118 WHICH LEGAL STRUCTURE IS RIGHT FOR MY SOCIAL ENTERPRISE? A GUIDE TO ESTABLISHING A SOCIAL ENTERPRISE IN THE UNITED STATES FOREWORD The Thomson Reuters Foundation launched TrustLaw Connect in July 2010, a global pro bono service that amplifies the impact of NGOs and social enterprises by connecting them with the best lawyers around the world. Our mission: spread the practice of pro bono worldwide to drive social change. It has always been a priority for us to support innovative organisations that have the potential to address many of the world’s environmental, humanitarian and social problems. As the social enterprise and social investment sector becomes increasingly sophisticated around the globe, we believe these efforts are especially key to having a large-scale impact on society, but their effectiveness may be impeded by lack of legal resources. How a social enterprise is legally structured can greatly influence the types of capital available to it and how the organisation can operate and grow. Whether you are just beginning to formulate your entrepreneurial idea or are already working in an established social enterprise, this Guide will give you a clear overview of the various legal structures available to you and includes a decision tree to help guide your way. We are grateful to Morrison & Foerster for producing this Guide as well as a similar one for social enterprises operating in England and Wales. Although this research is comprehensive, you may still need a lawyer to complete the actual registering, structuring or restructuring of your organisation, but we hope this Guide will help you navigate the myriad structures available to social enterprises in the US. -- MONIQUE VILLA, CEO, Thomson Reuters Foundation 1 WHICH LEGAL STRUCTURE IS RIGHT FOR MY SOCIAL ENTERPRISE? A GUIDE TO ESTABLISHING A SOCIAL ENTERPRISE IN THE UNITED STATES 2 INTRODUCTION This Guide is intended to help social entrepreneurs navigate through the array of legal structures that are available for them in the United States. The burgeoning field of social enterprise and the rise of impact investing have moved well beyond the dichotomy of for-profit and not-for-profit legal structures. For many social entrepreneurs, generating revenue (and sometimes profit) from their enterprises is a key driver, ensuring financial sustainability, generating returns for investors and avoiding the need to rely on charitable donations or grants. However, many such entrepreneurs also wish to pursue
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