How to Choose the Right Social Enterprise Legal Structures
Sole ProprietorshipA 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.
PartnershipA 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.
Cooperative SocietyCooperatives 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 OrganisationNon 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).
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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.
Social Enterprise: Turning Ideas into Action
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