A Guide to Purpose-Driven Legal Business Entities Types

There are four basic types of business entities to consider when starting your conscious company and one hybrid type of business organization.

The traditional available structures of for-profit and not-for-profit organizations may not adequately meet the needs of many social entrepreneurs, so some states have created new forms of entities that are specifically designed for social enterprises. They make a dual focus of profit plus another objective mandatory in varying degrees for these companies.

Low-profit limited liability company

Low-profit limited liability company (L3C) is a legal form of business entity that was created to bridge the gap between nonprofit and for-profit investing through a structure that facilitates investments in socially beneficial for-profit companies by simplifying compliance with Internal Revenue Service rules for program-related investments. This is a type of investment that private foundations are allowed to make.

An L3C is a for-profit venture that has a stated goal of performing a socially beneficial purpose rather than maximizing income. It’s a hybrid structure that combines the legal and tax flexibility of a traditional LLC, the social benefits of a nonprofit organization and the branding and market positioning advantages of a social enterprise.

The L3C is obligated to be mission-driven so there is a clear order of priorities for its fiduciaries, and it is designed to make it easier for socially oriented businesses to attract investments from foundations and additional money from private investors.

As of July 2020, only eight states allow this type of company structure: Vermont, Michigan, Wyoming, Utah, Illinois, Louisiana, Maine and Rhode Island.

The law regards a corporation as an entity separate from its owners. It has its own legal rights independent of its owners—it can sue, be sued, own and sell property, and sell the rights of ownership in the form of stocks. Corporation filing fees vary by state and fee category.

Social purpose corporation

Social purpose corporation (SPC) is a relatively new type of business entity, introduced in 2010. An SPC enjoys the same benefits as any corporation, but there are annual reporting requirements related to charitable or social purpose.

SPC directors and officers have the ability but are not required to make decisions that specifically offset maximizing profit with the special purpose in the corporation’s articles of incorporation.

As of July 2020, SPCs only can be formed in California, Florida, Washington and Texas.

B corporations

B corporations, otherwise known as benefit corporations, are for-profit entities structured to make a positive impact on society. For example, The Body Shop has proven its long-term commitment to supporting environmental and social movements, resulting in an awarded B corporation status. The Body Shop uses its presence to advocate for permanent change on issues like human trafficking, domestic violence, climate change, deforestation and animal testing in the cosmetic industry.

Nonprofit corporations

Nonprofit corporations exist to help others in some way and are rewarded by tax exemptions. Some examples of nonprofits are the Salvation Army, American Heart Association and American Red Cross. These types of business structures have one sole purpose: focusing on something other than turning a profit.

For-benefit organizations

For-benefit organizations are hybrid organizations with the primary purpose of delivering social and environmental benefit while still making money. They make up a fourth sector of the economy that’s been developing at the intersection of the private, public and nonprofit sectors for some time.

As of July 2020, this particular type of organization does not have any governmental legal special designation, nor are there any reporting requirements. However, for-benefit companies will write the benefit language into their corporate by-laws and often have internal reporting requirements.

Because they’re not driven by maximizing profits, for-benefit companies often are structured to advance their mission and values, such as paying more equitable wages, providing better working conditions, making community investments and reducing their environmental footprint. Per the fourthsector.org, scaling this sector by trillions is critical to achieving the 2030 Agenda for Sustainable Development.

These companies generally have two characteristics: a primary commitment to social purpose along with a predominantly earned-income business model. And most for-benefits also have one or more secondary characteristics that include:

  • Social purpose: A commitment to a mission is embedded in the organization’s DNA. Financial duty is tied to a mission.
  • Earned income: Sales of goods and services generate most of the income.
  • Inclusive ownership: Ownership rights are allocated among stakeholders in scale with their contributions.
  • Stakeholder governance: Decision rights on information and control are distributed among stakeholder constituencies.
  • Fair compensation: Employees and other stakeholders are compensated in proportion to their contributions.
  • Reasonable returns: Limitations on investment returns protect the organization’s ability to achieve its mission.
  • Social and environmental responsibility: Social and environmental performance constantly is improved throughout the stakeholder network.
  • Transparency: Social, environmental and financial performance and impact are fully and accurately assessed and reported.
  • Protected assets: Social-purpose assets are preserved upon dissolution, conversion or ownership transfer.