When recommending a business formation type, advisors typically take into account taxation, legal liability, and record keeping requirements as they relate to the particular circumstances of the would-be business owner. Missing from many advisors’ conversations is a fourth element – the business owner’s ethics and how they are expressed through the business model and operations. There is a strong case to be made for advisors to have a working knowledge of social purpose entities (SPEs) such as B and social purpose corporations, and low-profit, limited liability companies (LC3s). Worker cooperatives also fit into this SPE category, though this formation differs from the others in a number of ways.
Most business advisors tend to zero in on limited liability companies, and rarely if ever mention SPEs as alternatives. While LLCs have risen quickly in popularity, the most common formation is still sole proprietorship. There are practical reasons for keeping it simple. Many start-ups will not survive beyond year 3 or 4. The business model and ownership of any given venture may shift significantly within the first 5 years.
B-Corps, SPCs, and LC3s are options for business owners who strive to build organizations that emphasize the triple bottom line of people, planet, and profit. By allowing SPE designations, states are validating the right of business entities to place their social missions on par with the responsibility to deliver shareholder value. Owners of these firms believe that doing good and doing well are not mutually exclusive. They are attempting to take to the discussion of “corporate social responsibility” beyond the theoretical, feel-good practices of large corporations.
There is no doubt, however, that SPEs are part of an increasingly complex and evolving landscape of legal, accounting, regulatory, and ethical issues affecting business and the kinds of businesses entrepreneurs are choosing to form. They are approved in one form or another in almost all 50 states. Twenty-nine states have statutes that allow B-Corps, social purpose or flexible purpose (California only) corporation. L3Cs, first formed in Vermont have now spread to 10 states. Illinois now has a Benefit LLC, the only such hybrid in the country. Legislation is pending in other states. The process of becoming a certified B corporation, which requires meeting certain performance and legal requirements, is a governed by a non-profit organization, B Labs. More can be learned about this certification process by viewing a two-part webinar, “The Path to B Corp Certification", which can be found on YouTube. Below is part 1.
While worker cooperatives are well established in Europe, they have been receiving considerable attention of late in the US, in part because of the film Shift Change. In most respects, worker cooperatives operate like any other business. These firms may hire a professional management staff, but the major decisions about what the company produces and how are made by the member-owners on the basis of one person, one share, one vote. In addition to being profitable, worker cooperatives promote the economic welfare of all workers as a core value. The Democracy at Work institute, formed by the Federation of Cooperatives, provides a wealth of information about this formation type.
SPEs are not a panacea, but they do force business owners to think about their value proposition and zero in on an actual need or problem in the market. While they may be more complex than standard LLCs, they may also become good alternatives to non-profit formations, which can be very complicated and time-consuming to set up. Whether or not these entities can deliver on their lofty goals in significant numbers remains to be seen, but they deserve advisors’ attention. There is a niche for advisors who are willing to help entrepreneurs incorporate social missions into their business models. A working knowledge of these formation types is a tool that advisors should have in their toolboxes.