April 27, 2011

A growing number of small business hybrids are starting up these days. Often called social enterprises, they combine dual, and sometimes triple, missions, combining a for-profit bottom line with social and/or environmental goals. They range from Evergreen Lodge, a rustic lodge in Yosemite that hires and trains disadvantaged young adults, to Plum Organics, a seller of organic baby food.

If you’re thinking of starting such a company, be forewarned: There are some tricky issues involved. It can be hard to find investors willing to accept lower profits in exchange for meeting social goals. “No money, no mission,” says Marc Lane, a Chicago attorney who specializes in social enterprise law.

Then, there are governance issues. Companies interested in pursuing social and financial agendas can run into trouble with shareholders who might object to taking an action likely to hurt profits at the expense of the mission. “Those two objectives can collide,” says Lane.

One solution: Looking into one of the new legal structures in existence or in the works that address these challenges. According to Lane, they include:

1. The L3C

Standing for low-profit limited liability company, L3Cs largely target the funding issue. They’re also mostly for companies that, as the name suggests, see profits as decidedly secondary to their social mission. To that end, rather than helping such businesses find funding from angels or other more traditional investors, they’re aimed at attracting Program Related Investments (PRIs) from foundations. By law, foundations are required to distribute 5 percent of their money to charities annually through PRIs. Since they’re low profit, L3Cs can receive such money. “If foundations make an investment in a for-profit business with a charitable mission, that then can help attract private sector money into the same business,” says Lane.

One downside: To date, Illinois, Utah, Wyoming, Michigan, Louisiana, Maine and North Carolina have passed legislation allowing the structure to exist, and a handful of others are considering doing so. As a result, there are a lot of places where you can’t form an L3C—not yet at least.

2. The Benefit Corporation

This one is more about the governance problem. It focuses on companies with a triple bottom line—businesses that focus equally on profit, social, and environmental objectives. To be considered legit, firms’ bona fides have to be attested to by a third party. The benefit of the benefit corporation: Management and the board are protected if they take steps that further the mission but might not be great for profits. “It’s intended to inoculate the company, so shareholders can’t sue,” says Lane.

Like the L3C, there are some other considerations, however. For one thing, the form is legal only in a few states so far. And it’s unclear just what those third party vetting agencies will be.

3. The Flexible Purpose Corporation

This legal structure is now being debated by the California legislature. It requires directors of social purpose companies to consider the interests of shareholders, in addition to other stakeholders, but they can decide which concerns trump others. In other words, they’re free to make decisions that favor financial results over social goals. “It gives them the choice of how they mix and match objectives,” says Lane.

4. B Corporations

This isn’t a legal structure, but it’s a useful, related step for social enterprises to take. Certified B Corporations (B is for “beneficial”) are rated by a nonprofit group, Berwyn, Pa-based B Lab, according to five categories—like environmental and community activities—and a series of rigorous metrics. Certification doesn’t give you legal protection, but it does show investors and consumers you’re legit, and could help if you want to become a Benefit Corporation. There are about 400 such B Corporations in existence now.

According to Lane, in addition to the other benefits, all these legal structures can provide substantial marketing and branding advantages as well. With many investors and consumers skeptical of so-called greenwashing—attempts merely to create the impression that a company is socially oriented—companies that adopt one of these approaches make it clear that they’re serious players. And there’s another advantage, too: “In many cases, people are willing to pay a premium for these products,” says Lane.

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