A New Corporate Structure – Social Enterprise
Traditionally, business organizations have been guided by the profit motive, with those profits going to the owners of the organization. For example, the profits of a partnership belong to the partners and the profits of a corporation belong to the shareholders. If the objective of an organization is to promote social welfare, instead of primarily seeking to earn profits for its owners, the options available until recently were limited to not-for-profit legal structures such as societies, co-operatives or similar “non-business” entities. As well, income tax law can be disadvantageous for entities whose main focus is something other than maximixing its profits.
One of the difficulties with existing non-profit legal structures is that they are generally limited to charitable aims, and as a result have difficulty obtaining financing and carrying on a business that would generate profits that could be applied to charitable purposes. Another problem, particularly in the case of co-operatives, is that they tend to require a significant membership base in order to be successful. British Columbia experienced that issue over the past few years as a number of the smaller credit unions merged in order to become more economically viable.
In the last few years, some people have suggested that a new business structure be created as a hybrid of the two types of enterprises, namely for-profit businesses and not-for-profit organizations in order to overcome some of the difficulties that existing corporate structures face when trying to promote social causes.
The United Kingdom was first to do so, and in 2005 passed legislation to allow the formation of “community interest companies”, which are similar to traditional companies but which are intended to accomplish social or environmental goals using business activities and which are limited in their ability to distribute profits or assets to their shareholders. Various US states have since passed similar legislation to permit the formation of a “low-profit, limited liability company” or “L3C” within the existing structure of a limited liability company or “LLC”. British Columbia recently passed amendments to the Business Corporations Act to create a corporate structure similar to the UK model to be known as a “community contribution company”, although that legislation is not yet in force. No similar legislation has been proposed at the federal level so far.
On a related note, a new Canada Not-for-profit Corporations Act has been introduced in order to replace the former provisions of the Canada Corporations Act that governs entities such as co-operatives and credit unions in an attempt to streamline and update the requirements for that type of enterprise. BC’s co-operative legislation was amended in 2007 to permit non-profit co-ops known as “community service co-operatives” which prohibit the distribution of their property to members.
The comments in this article are intended as general information only and are not to be relied on as legal advice or an opinion applicable to your particular situation. For further information, please contact Bruce Farrend at Farrend Law.