Social enterprise legal structures
Social enterprises can choose from a variety of legal identities detailed below to suit their unique needs. Choosing the right form for your social enterprise can help it grow and take advantages of the benefits offered to different legal identities.
Here are some of the most common forms that social enterprises take:
A sole proprietorship is one of the simplest business forms for operating a business. It refers to a single person who owns and operates the business, and is personally responsible for its debts. Ideally suited to a small-scale enterprise, the sole proprietorship form has minimal legal requirements which makes it easy and inexpensive to set up. It has no distinct entity from the owner, which means that the owner’s personal assets may be at risk, and the sole proprietorship will cease to exist on the owner’s demise. However, sole proprietorships may face difficulty in accessing capital from traditional sources such as equity or grant funding. If an individual wants to have partners involved in running the social enterprise, or wishes to minimise his/her risk, this may not be the ideal structure.
A partnership requires two or more partners, bound by a written or oral agreement (ideally, a lawyer should help in drafting a written agreement) who agree to enter into business together. A partnership can have a separate legal entity from the owners, and in the event of demise of a partner, the procedure laid out in the partnership agreement will be followed and the partnership may continue to exist. Partnerships can be appealing because they allow for pooling of resources and talent, and in some countries also enjoy lesser tax levies. However, the partners bear an unlimited liability, thus putting their personal assets at risk.
Some countries have a variation of a partnership known as a ‘Limited Liability Partnership’. A Limited Liability Partnership contains elements of both partnerships and corporations (see below). In this form, a partner’s liability may be restricted to his/her investment in the partnership, and he/she will not be liable for another partner’s misconduct or negligence. Additionally, Limited Liability Partnerships often offer similar tax advantages to those enjoyed by partnerships, thus making it a more desirable form of partnership.
Cooperatives are enterprises which are controlled and owned by a group of people, and which work for their collective benefit and satisfaction of their collective needs. The members have an equal say in how the enterprise is run and how profit is divided. This is a very inclusive form as decisions are made collectively by all members. If a social enterprise has or intends to have a compact management team, it may not function most effectively as a cooperative society.
Non Profit Organisation
Non Profit Organisations or Non-Governmental Organisations are organisations which are independent from the state and are typically dedicated to furthering a particular social cause or advocating for a particular point of view. They lack a profit motive and they often enjoy tax exemptions or benefits. They usually have easier access to donor funding and grants in light of their charitable/social objectives and governmental support in welfare states. This structure is not conducive to all social enterprises because it limits the ability of an enterprise to pursue profits. Some social entrepreneurs have made this form suit their needs by running a parallel, for-profit entity, in what is known as the Hybrid approach (see below).
Company Limited by Shares
A company is an association of persons with a profit motive, and which enjoys a distinct legal identity. A company is recognised by law and enjoys many of the same rights as individual persons, such as the right to own property in its name and the right to sue other parties. This form has been widely adopted by social enterprises worldwide because of the flexibility it allows to pursue revenue-generating activities. It could also widen the pool of accessible funds for the enterprise, such as equity or investment by venture capitalist firms. The liability of owners in this form is limited to the extent of their investment, which can make it attractive. However, this structure is not legally required to have social objectives in addition to profit-maximisation, so care must be taken to safeguard the social mission of the enterprise. The management of such a company will be accountable to the shareholders, so there must be a clear understanding regarding the emphasis that the enterprise will be placing on its social objectives and profit-maximisation objectives.
The Hybrid approach is where social entrepreneurs launch twin organisations – one being for-profit and one being non-profit – and register them accordingly. While this can be cumbersome in terms of organisational structure and documentation, it allows the enterprise to capitalize on the benefits of both structures. It usually applies to enterprises which have outgrown their current legal form, and thus is unlikely to be the first form a social enterprise will take.
What’s right for you?
Choosing the legal structure most suited to your social enterprise can require some research and deliberation over important factors such as ownership, ease of setting up, potential tax benefits, access to types of funding and control. Each country may have slightly different variations of the legal structures detailed above and hence considering the important factors listed above can help you make your decision.