Legally Incorporating your Social Venture

 

You have an idea for a business activity that will generate a blend of social and/or environmental benefits and revenues for your organization. You are ready to launch a social venture. Under current legislation in Ontario, there is no legal structure that combines some of the benefits of both the for-profit and not-for-profit worlds.

In the U.K. and U.S., a number of such hybrid structures have emerged: the“B Corporation” in the U.S., which has expanded to Canada; the“Community Interest Company” (“CIC”) in the U.K. and; the low profit, limited liability corporation (“L3C”) in the U.S. Experts believe that these legal structures provide better opportunities for social ventures to attract investment and scale their operations. Several groups are researching the feasibility of adapting them to Canada, including a team from Ogilvy Renault LLP and SiG@MaRS. This group recently completed a review and analysis of U.K. and U.S. structures, and developed a recommendation to the Ontario Ministry of Research and Innovation for a creation of a new structure.

I n the meantime your social venture must carefully consider the current legal environment and existing legal structures and requirements associated with for-profit, not-for-profit, registered charities and co-operative corporations before you incorporate in Canada. You will need to hire qualified legal counsel to assist with the process, and should choose a firm that is knowledgeable and experienced with either social enterprises and/or social-purpose businesses, depending on your situation.

Your organization you should ask the following key questions: What is the underlying nature and intent of the profit-making activities of your operation? What will your operation’s profit be used for?

1. If you expect that there will be a broad range of profit-making activities to generate levels of profit that are similar to traditional businesses or slightly less (due to your social or environmental commitments), then you will likely choose a for-profit organization structure and become a social-purpose business.
2. If, in the course of achieving a social mission, your organization generates profits through profit-making activities which meet the definition of“related business” (as determined by the CRA), you will likely choose to be a social enterprise in a registered charity legal structure.“Related businesses” are defined as activities related to or ancillary to the charitable objects but can also be unrelated activities as long as substantially all (more than 90%) of the persons employed in the profitable activity are volunteers and not remunerated. For example, a storefront operated by a charity and staffed by its volunteers, selling donated goods may be considered a related business.
3. If your organization is an innovative social enterprise that wants to scale beyond the limits set by“related business,” grants and donations, you will likely rule out a registered charity structure and consider the not-for-profit organizational structure (“NFP”). NFPs can engage in profit-making activities provided that the activities are compatible with the not-for-profit objects of the NFP and the profits are used exclusively for promoting its stated goals. Indicators that an NFP may be operating an impermissible profit-making business include the following: (i) operation in a normal commercial manner; (ii) goods and services are not restricted to members and their guests; (iii) operation on a profit basis rather than a cost-recovery basis; and (iv) the business is operated in competition with taxable entities carrying on the same business. ( link to article: Legal consideration for Not-For-Profit Social Ventures)
4. If you are an organization that will provide a centralized set of services to a group of members who will have an equal vote on how the organization will be operated, and the business activities of the organization will be operated as nearly as possible on a cost recovery basis, you will likely choose a Co-operative Corporation structure.

Today, there is no right or wrong answer to whether you should establish your social venture as a not-for-profit social enterprise (stand-alone or part of a registered charity), a for-profit social-purpose business, or a co-operative. In the current legal environment, social entrepreneurs need to work with legal counsel, their boards and advisors to determine which legal structure works best for their situation. Where possible, you can then add ancillary agreements and processes to make the structure work better for your organization and your stakeholders.

References

Bridge, R., and Corriveau, S. (2009, February).Legislative Innovations and Social Enterprise: Structural Lessons for Canada.BC Centre for Social Enterprise. Retrieved November 10, 2009, from www.centreforsocialenterprise.com/f/Legislative_Innovations_and_Social_Enterprise_Structural_Lessons_for_Canada_Feb_2009.pdf

Carter, T.S., and Man, T.L.M. (2008, October 24). Canadian Registered Charities: Business Activities and Social Enterprise– Thinking Outside the Box. Presented at National Centre on Philanthropy and the Law Annual Conference: Structures at the Seam: The Architecture of Charities’ Commercial Activities.
www.charitylaw.ca/seminars..html

MaRS Discovery District. Legislative Innovations. white paper

Imagine Canada NonProfit Library Commons. Establishing a Charity or a Nonprofit Organization. Retrieved November 10, 2009, from  nonprofitscan.imaginecanada.ca/en/tir_establish_charity

Imagine Canada NonProfit Library Commons. Legal and Regulatory Issues. Retrieved November 10, 2009, from nonprofitscan.imaginecanada.ca/en/legal_regulatory

 Industry Canada. (2009, September 1.) Not-for-Profit Organizations (Canada Corporations Act, Part II). Retrieved November 10, 2009 

B Corporation. Retrieved November 10, 2009 from www.bcorporation.net

Community Interest Companies. Retrieved November 10, 2009 from www.cicregulator.gov.uk/

 Vermont Secretary of State: Corporations Division, Low-Profit Limited Liability Corporation – www.sec.state.vt.us/corps/dobiz/llc/llc_l3c.htm – Vermont Secretary of State: Corporations Division

Canada Revenue Agency. (2001, August 2.) Bulletin IT-496R Non–Profit Organizations. Retrieved November 10, 2009

Co-operative Corporations Act(R.S.O. 1990, c. C.35), ss. 143, 144.

CRA, Bulletin RC 4108 Registered Charities and the Income Tax Act 

Charitable Gifts Act(R.S.O. 1990, c. C.8), s. 2(1).

Tags: charities, incorporation, legal, not-for-profits, social-entrepreneurship, social-innovation