Friday, May 18, 2012 - 8:12am

 

posted by
 Karina Lungo,
Research Aide,
ASU Lodestar Center


Welcome to Research Friday! As part of a continuing series, we invite a nonprofit scholar, student, or professional to highlight current research reports or studies and discuss how they can inform and improve day-to-day nonprofit practice.

Do you have passion for social good and want to step out and lead it? Or maybe you have a great idea to create your own business, but want to balance making a profit with creating social impact?

Let’s face it, sometimes we struggle between our commitment to helping society and our personal needs for monetary income. In the finance class of the MNpS program at ASU, we were introduced to a fascinating article by Jim Fruchterman: For Love or Lucre. He suggests that all social entrepreneurs should balance the following four factors when deciding on a legal structure for their venture:

  1. Motivation: how strong is our motivation for a social mission vs. making a profit?
  2. Market: who are the customers we want to serve, and what is the competition?
  3. Capital: how much money do we need to get the venture started and keep it going, and how important are tax considerations?
  4. Control: how much control and decision power do we want to have in our enterprise? Are we willing to share it with the community, a board, investors, or partners?

 So when it comes to choosing the right legal structure for an enterprise, there are several options out there, most of which are available in Arizona:

 

    • For-Profit with a Social Overlay: Under this classification we have the for-profit organizations that by law or by definition are expected to work for the common good.  Although they are not tax-exempt, nor can they receive tax- deductible contributions, these organizations open up business and social impact opportunities for an enterprise, and give customers the opportunity to support a social cause when purchasing good and services.  For example we have the following:

        1. Low-Profit Limited Liability Company (L3C) and Benefit Corporation. Although not yet available in Arizona, several other states are using these legal structures. Different from for-profit structures, these organizations are required by law to have a social mission, which potentially can increase public support for their business. The main motivation for the creation of L3Cs is that they are eligible to apply for program-related investment funds from private foundations.


        1. An alternative that is available in Arizona is for a for-profit company to become a certified B-Corporation through B-Lab. B-Corp certification is not a legal status, but instead is a certification granted by B-Lab to selected for-profit organizations that have a social mission. Having this certification means they comply with certain standards in promotion of a social cause.  In Arizona there are four certified B-Corps, among them Goodmans Interior Structures and Sputnik Moment.


      1. Yet another alternative is to form a Social Cooperative. The term cooperative is more broadly known internationally and is not necessarily tied to a particular legal structure. What all cooperatives have in common is that they are operated by members for the benefit of members. Social cooperatives also have a mission that benefits the whole community.

 

  • Nonprofit: Finally, we have the 501(c)(3) charitable organizations as the option for those of us who are highly driven by a social mission. Nonprofit organizations are tax-exempt if they comply with IRS requirements. In addition, they can receive support from the public in the form of tax-deductible contributions and volunteerism. And to make it more interesting, if we have the passion and skills for commercial activities at the same time, there is the option of creating a nonprofit social enterprise that returns its profits towards the support of a cause; such as Goodwill.

I am sure I have not listed all of the possible legal options. Another alternative is to combine different legal structures by forming “hybrid” partnerships, as happens when a for-profit business and a nonprofit organization join their efforts.

The good news is that along the spectrum from a high motivation for profit to a high motivation for social impact, there are now many more options for organizing enterprises to make a positive impact in our communities.

Karina Lungo is a graduate student in the MNpS program at Arizona State University. She has vast international experience since she was born in El Salvador and has lived and traveled in several other countries. Today she works for the ASU Lodestar Center as a Research Aide for Arizona Scope of the Sector and Compensation Studies.


Sources:

1. Fruchterman, Jim. (2011) For Love or Lucre. Retrieved April 9, 2012, from Stanford Social -Innovation Review: Informing and Inspiring Leaders of Social Change: http://www.ssireview.org/articles/entry/for_love_or_lucrehttp://www.ssireview.org/articles/entry/for_love_or_lucre.

2. "Cooperative Development Institute." CDI Home. Web. 1 Apr. 2012. http://www.cdi.coop/.

3. "Certified B Corporation." B Corporation. Web. 1 Apr. 2012. http://www.bcorporation.net/about.

4. "Benefit Corporation." Benefit Corporation. Web. 1 Apr. 2012. http://benefitcorp.net/.

5. IRS. (2012, January 10). Exempt Purposes – Internal Revenue Code Section 501(c)(3). Retrieved April 26, 2012, from IRS: http://www.irs.gov/charities/charitable/article/0,,id=175418,00.html.

6. IRS. (2012, February 16). Limited Liability Companies. Retrieved April 3, 2012, from IRS: http://www.irs.gov/businesses/small/article/0,,id=98277,00.html.

7. IRS. (2012, February 24). Partnerships. Retrieved April 3, 2012, from IRS: http://www.irs.gov/businesses/small/article/0,,id=98214,00.html.

8. IRS. (2012, January 18). S Corporations. Retrieved April 3, 2012, from IRS: http://www.irs.gov/businesses/small/article/0,,id=98263,00.html.

9. IRS. (2012, March 16). Sole Proprietorships. Retrieved April 3, 2012, from IRS: http://www.irs.gov/businesses/small/article/0,,id=98202,00.html.

 

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Comments

Thanks for your blog, I am just starting to take classes that are touching on these different types of structures and you explained them very clearly. I like the idea of the Low-Profit Limited Liability Company because it is for-profit, but still has a social mission. I assume this brings in more consumers who are mindful about social issues, which would help a company compete against larger for-profit companies while still having a positive impact in the world. I wonder when this option will be available in Arizona, though. If several other states are already using this model, I'm hoping we aren't far behind.

Nick Moran
TDM Major at ASU

I really enjoyed reading this blog, thank you for introducing me to Jim Fruchterman's article "For Love or Lucre." I want to learn more about becoming a social entrepreneur and I completely agree with the four factors; Motivation, Market, Capitol, and Control.

I appreciate this article for explaining the different options available to people who are considering starting a business. I feel as though many of these options are very dependent on where a person is in life. For someone just starting out, the LLC would likely be the best option. Everyone wants to be successful, but people should also be mindful of contributing to the well being of society. That is why once I have an established business, I would start to shift my interests towards being more charitable.

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