Theory: Why is legal form such an important issue for social enterprise? What legal forms can social enterprises assume, and what are the pros and cons for each form? http://www.socialentrepreneurship.ca/entr4800

1. ENTR 4800: Social Entrepreneurship
Class 6 (Part 2): Legal Considerations
Monday, October 25, 2010
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Instructors:
Norm Tasevski (norm@socialentrepreneurship.ca)
Karim Harji (karim@socialentrepreneurship.ca)

2. © Norm Tasevski & Karim Harji
Agenda
• After the break…
• Legal forms applicable to social enterprise
• Who sets the rules?
• Legal Innovations
• What did we learn – today?
• Next week
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3. © Norm Tasevski & Karim Harji
A Caveat…
There is no defined (national or provincial) legal form
for social enterprise in Canada
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A Second Caveat…
Form follows function
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6. Legal Forms Applicable to Social
Enterprise…
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7. For-Profit
Corporation!
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Non-Profit
Corporation!
Charity!Partnership!
Sole
Proprietorship!
Co-Operative
Corporation!

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For-Profit Corporation!
• Incorporated under the Business Corporations Act (Ontario) (the “OBCA”)
or the Canada Business Corporations Act (federal) (the “CBCA”)!
• With share capital!
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• Most flex in terms
of profit-making
activities!
• Can access all
forms of investment
(debt, equity, etc)!
• Provides clarity of
purpose (i.e. the
financial bottom
line)!
• Limited personal
liability!
• Pay corporate tax!
• Cannot access grants!
• Cultural/
psychological barriers
with operating a “for-
profit social
business”!

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Charity!
• Incorporated via Letters Patent under the Corporations Act (Ontario) or
Canada Corporations Act (federal)!
• Without share capital!
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• Don’t pay corporate
tax on earnings!
• Can issue tax
receipts!
• Can access many
government/
foundation/
corporate grants!
• Least flex in terms of
profit-making activities!
• Limited in the types of
investments you can
access (e.g. equity)!
• Time-consuming!!
• Psychological barriers
with operating a “social
business”!
• An aversion to “risk
taking”!
• Can lose status if “too
successful”!

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Sole Proprietorship!
• Registered via Business Names Act (Ontario) or Canada Corporations Act
(federal)!
• Without share capital!
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• The simplest (and
quickest) legal form!
• You have full
control of business
decisions!
• Flexibility to make
business decisions
quickly!
• No separate filing
for income tax!
• Unlimited liability!!!
• The business is the
entrepreneur!
• Hard to find investors!
• Limited creative input
(i.e. you’re the only
one with ideas!)!
• Less “professional”
than other forms!

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Non-Profit Corporation!
• Incorporated via Letters Patent under Corporations Act (Ontario) or Canada
Corporations Act (Federal)!
• Generally without share capital!
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• Can access grants!
• Can access debt
financing!
• Tax exempt as long
as organized and
operated for defined
social/community
benefit!
• Some NPs are more
open to (limited)
risk-taking!
• Can’t issue tax
receipts!
• Limited in the types of
investments you can
access (e.g. equity)!
• Psychological barriers
with operating a
“social business” !
• Can lose status if
“too successful”!

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Partnership!
• Registered under the Partnerships Act (Ontario)!
• With or without share capital!
• Usually organized using a Partnership Agreement!
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• Similar benefits to
sole proprietorship!
• Combines skills/
competencies of
two people!
• Can sign contracts
and borrow money in
its own right!
• For most
partnerships, unlimited
liability! (at least in
Canada…)!
• Acrimony between
partners is common!
• Difficult to find
investors!

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Co-Operative Corporation!
• Incorporated under the Co-Operative Corporations Act (Ontario) or Canada
Cooperatives Act (Federal)!
• Wither with or without share capital!
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• Well-established
structures!
• Integrates the
concept of
“community benefit”
already!
• Cannot issue tax
receipts!
• Generally not exempt
from paying tax!
• Psychological barriers
with operating a
“social business”!
• Difficulty making
decisions (too many
people at the table)!

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Exercise:
Which legal form makes sense for…!
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Exercise:
Which legal form makes sense for…!
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Your venture???!

16. Who sets the rules?…
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Specifically…

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CRA Guidelines
• Direction (law, regulations, guidelines, precedents)
around social enterprise are not completely clear
• Community economic development (CED)-specific
exemptions:
– Relief of unemployment: training business.
– Relief of poverty through operating stores: business that
provides low-cost necessities.
– Relief of people with disabilities: “social business.”
– Relieving suffering in economically challenged
communities
• Federal view of the business activity may differ from
any provincial position
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An Evolving Conversation…
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Hybrid Structures
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Talk to a Lawyer!
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23. Legal Innovations…
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Legal Innovation: CIC (UK)
• Established to trade (goods or services) for the
community good
• Requires “community interest statement” application to
the CIC Regulator. Publically-available annual reports
required to confirm (adherence to) community interest
requirement
• May issue shares in order to raise capital
• Cap on returns (dividends paid) set by the Regulator
• Subject to an “asset lock”
– Assets and profits must be permanently retained by the CICs
for community benefit, or transferred to another CIC subject
to an asset lock, or to a charity
• Taxed in the same manner as other businesses
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Legal Innovation: L3C (US)
• Variation on American Limited Liability Companies (LLCs)
• LLC investors are members rather than shareholders
• Terms of the operating agreement guarantee the public
benefit nature of the entity’s work
• Like LLCs, L3Cs are not subject to federal income tax
themselves, but the income they pay to members is
taxable according to the rates applicable to each
member
• Able to attract private capital through the sale of shares
and other securities, various forms of loans, or other
commercial financial arrangements.
• Ability to receive Program Related Investments from
foundations
• No asset lock and no dividend cap
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Legal Innovation: B Corp (US)
• To be certified as a B
corporation under the B Lab
system, the corporation
must:
– Achieve a minimum score of
80 (out of 200) on the B
Ratings System, a tool to
assess a company's social
and environmental
performance.
– Agree to make legal
changes to its articles of
incorporation to expand the
responsibilities of the
company to include
consideration of stakeholder
interests.
– Pay B Lab an annual
licensing fee.
– Recertification is required
every two years.
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Summary: Key Questions
• Is the venture’s primary mission mostly social or profit?
• What are the founders’ views, skills, motives, and
intentions? How closely held is the organization?
• What is the market for the primary activities (goods/
services)?
• How much money is needed and where will you get it?
• What level of risk and liability is your organization willing
to take?
• What will be the relationship between the enterprise and
the parent organization? Will the enterprise be a
separate entity? What is the governance structure of the
enterprise (separately and in relation to the parent
organization)?
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What did we learn?
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For your projects…
Clearly identify the following:
– Your legal form and why you chose it
– How it aligns with your proposed revenue stream(s) and
investment sources
– How it aligns with your plans for growth
– How it balances the financial and social considerations
and motivations for your venture
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Next Week
• Guest speakers:
– Serge Levert-Chaisson - Sarona Asset Management
– Adam Spence - Social Venture Exchange (SVX)
• Deliverable: Assessment of Business Potential
• Readings: Impact Investing and Social Capital
Markets
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References
• “The Canadian Social Enterprise Guide, 2nd Edition”, Chapter
7 (The Legal Context), by the Enterprising Nonprofits Program
• “Legislative Innovations and Social Enterprise: Structural
Lessons for Canada” by Richard Bridge and Stacey Corriveau
• “The Fine Print: Vital Information for Canadian Charities
Operating Social Enterprises” by Stacey Corriveau
• “Canadian Registered Charities: Business Activities and Social
Enterprise – Thinking Outside the Box” by Terrance Carter and
Theresa Man
• “Social Enterprise: Choosing a Legal Form for your Social
Enterprise,” by the Business Link Business Service Centre and
Western Economic Diversification Canada
• “Legislative Innovations” by William Chung, Mark Convery,
Kerri Golden and Allyson Hewitt, MaRS Discovery District
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