+ achieving social impact: profit with purpose eric davis managing partner elliott & davis, pc ...
TRANSCRIPT
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Achieving Social Impact: Profit with Purpose
Eric DavisManaging PartnerElliott & Davis, PCwww.elliott-davis.com
Anne Marie ToccketPrincipalProcopio [email protected]
+Agenda
Definition of terms
Examples of social enterprises
Benefits and Risks for nonprofits and entrepreneurs
Legal considerations and types of entities
Break
Demystifying B Corporations and B Corp Certified businesses
Case study
Discussion and Questions
+Working Definitions
Social Enterprise* – a venture undertaken by an NPO or social business that uses market-based approaches to achieve a dimension of its mission
Social Entrepreneurship – a venture undertaken by an individual that creates a replicable, scalable market-based solution to an intractable social problem
B Corporation – an emerging legal form of entity available to incorporate social enterprises, often confused with B Corp Certification. Available in 28 states, including PA and DE.
B Corp Certification- a third-party recognition of the social practices, norms and values of a for-profit company – NOT a legal entity
Social Impact – the desired result of social enterprises, social entrepreneurs, B Corporations, some private enterprises, NPOs, and other non- and for-profit ventures
Impact Investing: the injection of capital into a social enterprise or other venture, intended to catalyze increased social impact
+Examples Social Enterprises:
Equal Exchange Waldorf Schools Ted Talks (owned by nonprofit) EECM Workforce, Inc. Awamaki
Social Entrepreneurs and Their Ventures: Grameen Bank (Muhammad Yunus) Manchester Bidwell Corporation (Bill Strickland) Tom’s Shoes (Blake Mycoskie) Seventh Generation (Jeffrey Hollender)
B Corp Certified Companies: Patagonia Ben & Jerry's Thread International Big Idea Bookstore
+
Why Should a Nonprofit Form a For Profit Social Enterprise?
Financial Sustainability/Generate Revenue
Limit Unrelated Business Income
Separate Risk/Liability
Position of Organization in Community
+
Why Should an Entrepreneur ConsiderForming a Social Enterprise?
Marketing Differentiation
Attract mission-driven team members
Ability to formalize values and social impact metrics
Opportunity to take idea to scale
Opportunity to attract new types of investors and capital
+New York Times case studyPart 1
Rapidly scaling nonprofit social enterprise quandary: How to generate more revenue with the fewest restrictions, allowing team to focus on achieving mission? Remain a nonprofit Abandon nonprofit; form a for-profit Consider a hybrid model
Following slides illustrate deeper inquiry into possibilities, risks and benefits of all three approaches
Choice revealed later in this session
+
What Form of Corporate Entity is Best For Your Social Enterprise?
Nonprofit
LLC (organized under B Corp principles)
Benefit Corporation
Corporations, Limited Partnerships, etc.
+Social Enterprises vs.Nonprofits & For Profits NonProfit Versus For-Profit.
Benefit Corporations, LLCs, Flexible Purpose Corporations and LC3s, are a blend of the two.
Twenty-eight states, including Delaware, have benefit corporation statutes.
B Corporations became a form of entity in PA in 2012 and in Delaware in 2014.
Social Enterprises have been organized as nonprofits, LLCs and Corporations for years. -Long before the advent of Benefit Corporations.
+Financial Sustainability/Revenue Generation for Nonprofits Reduces Reliance on Foundation Support and
Charitable Giving
Introduces or increases Financial Sustainability to the Organization
Nonprofit Should Earmark Funds Derived From Social Enterprise for Particular Programs if Seeking Foundation or Major Donor Support to Start Social Enterprise
Note that many for-profit businesses fail and this is a risk for any social enterprise.
+Unrelated Business Income
Generally speaking, nonprofits must pay tax on income generated that is not directly related to charitable purposes.
Business activity might distract organization from true reason for existence and requires resource allocation that might reduce resources for nonprofit
Business activity may skew financials of nonprofit organization and it is good to keep it off its books. Examples…
Unrelated Business Income draws attention/ire of IRS and local taxing authorities
+Separate Risk/Liability
Legal Rule of Thumb is that, if the Character and Nature of Risk is Different, then a Separate Corporate Entity should be Considered.
Many Nonprofits have valuable facilities, endowments and other assets that need to be protected.
Business activities may give rise to new types of Employment related liabilities.
+Organization in Community
Competing Against Local Businesses
Property Taxes
Unfair Trade Practices (Using donated equipment, volunteers, etc. to compete)
Local businesses and their employees could be your donors, volunteers, people you serve
Best way to avoid inadvertently hurting existing businesses in the community is to engage in activities that those businesses aren’t interested in. For example, hiring those hardest to train, using space that would be unused, selling products or services in great need, but that are no profitable to sell, etc.
+Why Choose a Benefit Corporation as a Form of Entity?A New Class of Corporate Entity to Increase Transparency and Accountability.
Needs: General Public Benefit“material positive impact on society and the environment, taken as a whole, assessed against a third party standard, from the business and operations of a benefit corporation” Third Party StandardDeveloped by a party not related to entity it’s measuring. Transparent in methodology. Special Public Benefit
Providing individuals/communities with beneficial products and services.
Promoting economic opportunities for individuals or communities beyond job creation and making money.
Promoting health or environmental preservation
Promoting arts and sciences. Reporting of Public Benefit
InformationIssue annual reports including records of successes and failures for general and specific public benefit (within 120 days after fiscal year + must be publicly available)
Formation Articles of IncorporationMust state benefit corporation status and specific public benefit. (Similar to nonprofit) BylawsMust include public benefit purpose, management duties and reporting of public benefit information Stock Certificates/Shareholders
AgreementsShould include specific language
Management Directors must take benefit into account
on all decisions. Annual assessment by third party Some states require a benefit director (a
good idea in practice)
Taxes Subject to corporate tax on net income Dividends are subjected to personal
income tax No favored Tax Status (may change some
day)
+Why Choose an LLC Form of Entity?Guidlelines for Looking Ahead to B-Corp Certification
Needs: General/Special Public Benefit“material positive impact on society and the environment, taken as a whole, assessed against a third party standard, from the business and operations of a benefit corporation” Third Party StandardDeveloped by a party not related to entity it’s measuring. Transparent in methodology. Reporting of Public Benefit
InformationIssue annual reports including records of successes and failures for general and specific public benefit (within 120 days after fiscal year + must be publicly available)
Formation Certificate of OrganizationMust state specific public benefit (like non-profit) Operating AgreementIncluding public benefit purpose, management duties and reporting of public benefit information. Certificates of MembershipShould include specific language
Management Manager(s)/Management committee
must take benefit in account on all decisions
Annual Assessment by third party Certificates of Membership Interests
Should Include Specific Language
Taxes No favored tax status.
(May change some day)
Raising Capital No difference. Debt & Equity Financing
is OK Consider seeking Risk Capital from
groups looking to fund social benefit aspects
+What’s the difference between being a Benefit Corporation and Being B Corp Certified?
Benefit Corporations and Certified B Corporations are often confused.
Certified B Corporation is a certification conferred by the B Lab. Benefit Corporation is a legal status administered by a state.
Benefit Corporations do NOT need to be certified.
Certified B Corporations are using the third party (B Labs) to show that they meet a high standard of overall social and environmental performance. Often seeking marketing differentiation.
+Social Enterprises in PennsylvaniaSeek B-Corp Certification (www.bcorporation.net)
Voluntary Certification, NOT Legal Structure
Can Be Applied to Any Legal Structure
Differentiates Good Companies from Companies with Good Marketing/PR
Periodic Assessment/Must Publish Results
Need to Score Better than 80/200 on B-Labs Assessment
Require addition of language to Bylaws/Operating Agreement
No difference in Tax Treatment
+What Are Accounting Issues Associated with Social Enterprise? Regular Corporate Taxes
Need to Be Concerned with Retained Earnings
Best Strategy is for Social Enterprise to Pay for Things that Nonprofit Needs, reducing profits for for-profit
Consumable Materials Non-depreciable Assets Staff Rental
Only (serious) tax consequences occur if Social Enterprise becomes Super Successful and generates more money than it can use to support nonprofit
+Integration Issues Associated With Separate For-Profit Entity
Business Mindset is Often Not Aligned with Nonprofit Values
What happens when Social Enterprise reduces (even temporarily) resources available to Nonprofit?
Identity of Nonprofit could become associated with business activity (Girl Scout Cookies)
Curious thing to note about example is that Girl Scouts Don’t Pay Tax on Cookie Sales Because Volunteers Conduct Activity and it is (somehow) related to charitable purpose.
“Customers” may expect more than people receiving products/services/help for free. Implications?
+Management of For-Profit Subsidiary “Bake In” Ethos of Nonprofit Into Subsidiary’s
Organization Documents. Examples…
Create Test Derived from Statement of Purpose for Analyzing Management Decisions. Examples…
Develop Metrics for Measuring Success and Report Results
Need for Strong Benefit Manager/Committee
Mechanisms for Benefit Manager/Committee to Exercise Power if Benefit is Not Being Adequately Considered
Transparency and Reporting
+New York Times case study Part 2
Saul Garlick’s decision to go for-profit based on: Lower energy expended to meet widely variable
expectations of donors Ability to spend revenue where most needed, not to meet
overhead percentage conventions Had found a model that generates revenue; profit expected
in 3 years Avoids conflict of interest (Saul as CEO and ED
simultaneously)
What do you think? In-class examples.
+Thank You! Discussion and QuestionsContact Us!
Eric Davis
www.elliott-davis.comw
ww.pghstartup.com
Anne Marie [email protected]
www.awamaki.org
www.procopiofundraising.com