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Social Entrepreneurs: Non-Profit v. Benefit Corporation

shavonsmith • May 17, 2015

As we close out Black History Month, take time to reflect on what you can do to leave the world a little bit better than you found it. It’s a new day where entrepreneurs are matching their desires to do good with their business ideas and becoming “social entrepreneurs.”  Social entrepreneurs develop business models that blend traditional capitalism with innovative and transformative solutions across education, health, environment, and enterprise development.

Social entrepreneurs aim to build strong and sustainable organizations, which are either set up as not-for-profits or traditional companies.  Many states have enacted new laws that permit the set up of a new corporate form: benefit corporations (often referred to as B-Corps).  B-Corps are corporate entities legally required to create benefit for society as well as its shareholders.  For instance, Seventh Generation, which specializes in green household and personal care products, is a B-Corp. The question for many entrepreneurs who aim to do good with their enterprise is whether to set up as a non-profit as opposed to other business models, such as a B-Corp.

The biggest difference between a B-Corp and a nonprofit organization is that the benefit corporation is a for-profit corporation and the nonprofit is a not-for-profit corporation.  Sounds simple enough, but how do you choose?  In a non-profit, the board of directors is charged with upholding the mission statement of the nonprofit and no individual within a nonprofit is legally allowed to profit from dividends or additional money left over after all expenses have been covered.  The directors in a B-Corp are also charged with upholding the mission statement of the organization, but the directors are also obligated to maximize profits for shareholders.  Doing good and maximizing profits are tenets that can often be conflicting, resulting in disputes among shareholders and board members.

The two legal benefits of becoming a B-Corp address the seemingly at odds goal of doing social good and maximizing profits.  Mainly, the B-Corp protects the company from shareholder suits complaining that the company’s management is focusing on considerations other than maximizing profits and weaves the company’s social mission into the corporation’s formative documents, so that the mission cannot be eviscerated by a hostile takeover by shareholders. There are also tax implications to consider.  Many non-profits decide to obtain 501c3 tax-exempt status, while B-Corps are taxed like a normal corporation.

So again, which to choose? It simply depends on your end goals.  If you think your idea has the opportunity to change the world and do lots of good, but you also think it can generate a lot of money, you may want to consider a B- Corp.  On the other hand, if you intend to obtain funding via donations or grants a non-profit with 501c3 status may be the way to go.

Want to discuss this further? Contact me today at sjsmith@thesjslawfirm or  202-505-5309  to schedule a complimentary consultation.

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