Monday, December 12, 2011

Legally Beneficial

By Jonathan Miller, Project Associate. 

In a November 12 opinion piece in the New York Times, William Deresiewicz, argues that my generation, the “Millenials” (a term that resonates very little with me) are “polite, pleasant, moderate, earnest, friendly,” unlike generations such as the beatniks, punks, and “slackers of the late ’80s and early ’90s.” While I believe there were, in all likelihood, pleasant beatniks and friendly slackers, Mr. Deresiewicz says that such an attitude has made my generation apt to be salesmen (and saleswomen), the product of wanting to please others, while combining ambition, autonomy, and imagination. He dubs us Generation Sell.

One of the trends that Mr. Deresiewicz picks up on is that to us “what’s really hip is social entrepreneurship — companies that try to make money responsibly, then give it all away.” I think his observation is dead-on. One of the evolutions in entrepreneurship, one that can be seen as a bridge between Generation Sell and social entrepreneurship, is the formation of new corporate structures that are specifically designed to reflect a social purpose, while retaining the ability to raise capital and scale the company.

What little I know about starting a business primarily comes from commercials (my lawyer-to-be fianc√© is giving me the “really?!” look right now). However, I do know that to start a business you must choose to structure as either a non-profit or for-profit entity. Entrepreneurs wishing to raise capital and grow their businesses have traditionally been limited to either a corporation or a limited liability company. The attractiveness of such structures to social entrepreneurs are limited by fiduciary duties (tradeoffs between social investment and foregone profits can be dicey) in the former, and a lack of confidence by capital markets in LLCs (stemming from tax burden issues) in the latter. To address such inadequacies, states across the nation have adopted new business forms and now offer social entrepreneurs new models for doing business.

The following three structures are indicative of the new wave of thinking about corporations and the overall purpose. The structure descriptions can be found in a December 11, 2011 Wall Street Journal guest column by Kyle Westaway entitled “New Legal Structures for 'Social Entrepreneurs'.”

Low Profit Limited Liability Company (L3C)

Available in VT, MI, WY, UT, NC, LA, ME, and coming soon to RI

The primary purpose of an L3C is charitable in nature, followed by profit. With the same liability and “pass through taxation as an LLC” this structure allows for entrepreneurs to raise both traditional capital and debt and equity capital called Program Related Investments (capital from foundations or regular companies that is intended to further the charitable purpose, and while the loan will be repaid, it is not a means of generating income). Also, profits may be distributed to owners.

Benefit Corporation

Available in MD, VT, VA, NJ, HI, CA, and soon CA

Benefit corporations must operate for the general public benefit, which is a “material positive impact on society and the environment.” Such impact must create value for shareholders, the community, the environment, employees, and suppliers. Further, every Benefit Corporation must use an independent third-part assessment tool to publicly chronicle its operating benefits. High transparency and increased accountability standards are key aspects of the benefit corporation.

Flexible Purpose Corporation

Available in CA

Very similar to a combination of an L3C and a Benefit Corporation, the Flexible-Purpose Corporation aims to balance a designated special purpose, such as promoting awareness of poverty or minimizing effects of pollution, and profit. The special purpose is written into the articles of incorporation. Accountability standards are not as rigorous as those of a Benefit Corporation, but annual public disclosure of the special purpose, metrics used to gauge success, resources devoted to the special purpose and whether goals and objectives have been met, is required. According to the California Working Group for New Corporate Forms, “the Special Purpose requirement is designed to put shareholders and potential shareholders on notice that the corporation will pursue agreed interests that may (or may not) align with profit maximization.”

While Generation Sell is certainly not the only generation backing these new forms of business, it is clear that the traditional roles of for-profit and non-profit that have developed through many generations are changing. Perhaps Mr. Deresiewicz could add a few more adjectives to describe our generation…I would be fine with “social,” “innovative,” and “aware.” 

More information can be found here: