Social Entrepreneurship—Too soon?

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Many entrepreneurs are intrigued by the new buzzwords sweeping the community – “social entrepreneurship.”  Social entrepreneurship seeks to combine the most popular features of for profit entities (namely, eh, profit) with the best features of typical non-profit entities (the charitable or socially beneficial mission).

One particular advantage that proponents of social entrepreneurship suggest is that these hybrid models will be able to seek more investment than traditional non-profit ventures while simultaneously continuing the public benefit mission of non-profit entities.

However, it is important for startups to stop and really do their research when it comes to social entrepreneurship and what it really means. The most popular social entrepreneurship entities are the L3C and the B Corp.

 The L3C is a “limited profit limited liability company,” while the B Corp is a “Benefit Corporation.” Both are new structures which strive to combine the public benefit mission of non-profit entities while allowing some amount of profit. This hybrid model is designed to attract more investors to entities whose mission is to benefit the community by enticing them with profit incentives.

However, while L3Cs and B Corps sound great in theory, it is important to consider some of the legal issues surrounding such entities:

  • Both L3C’s and B Corps have rather uncertain legal implications;
  • Both L3C’s and B Corps are only recognized in a minority of states;
  • The IRS has not provided significant guidance on either entity yet, and it is unclear what position the IRS will take–meaning there is a lot of gray area when it comes to the tax aspects of such entities;
  • Further, it does not appear that there are any significant tax advantages to either entity.
  • In addition to all this uncertainty, there remain concerns as to how the need for profit can successfully be balanced with social mission on such a broad scale.

So, before you start working on a business model that is based on an L3C or B Corp structure, we suggest you contact an attorney (and, probably, an accountant) to discuss whether this structure is the most appropriate for your business and charitable goals.


DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Chambliss, Bahner & Stophel, P.C. | Attorney Advertising

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