THE BLOG
12/09/2013 06:46 pm ET | Updated Feb 08, 2014

Starting a Social Enterprise? 6 Useful Tips From Legal Experts

Social entrepreneurs set their eyes on radically improving the world. Florence Nightingale, a 19th-century pioneer of healthcare reform and the modern nursing practice, is an often-cited example. But unlike Nightingale, social entrepreneurs today typically set up social enterprises, or revenue-generating ventures that address the world's current challenges including poverty, environmental protection and social exclusion.

Yet starting a business can be a daunting task, especially when it comes to navigating the law. In the United States, social entrepreneurs juggle with whether they should be establishing a nonprofit, for-profit, LLC or benefit corporation. And because social entrepreneurs often push boundaries in their respective fields, they run into problems such as absent legal framework for doing their work or they become unsure whether their work falls within the confines of the law.

As the number of social enterprises grows, so too does the importance of conversations about navigating the law. To get the dialogue rolling and make starting up less intimating, I've asked legal experts to share their advice for up-and-coming social entrepreneurs.

  1. Don't view legal form as "one size fits all." Just like with shoes, there is no "one size fits all" legal form for social enterprise, says Cassady V. Brewer, assistant professor at Georgia State University College of Law. Brewer says that a social entrepreneur should seek competent legal advice before choosing the best organizational form -- nonprofit, for-profit, or something in between -- for his or her business. If legal advice cannot be obtained due to costs and other reasons, Brewer explains is it difficult to go wrong with a wholly-owned limited liability company (LLC). "Wholly-owned LLCs can be used for virtually any business model, and if future circumstances require a change, LLCs are adaptable and even convertible into other forms of legal entities," he said.
  2. Understand that legal form is merely a tool. Alicia Plerhoples, associate professor of law and the director of the Social Enterprise & Nonprofit Law Clinic at Georgetown University Law Center, warns that the laws surrounding new corporate forms in the United States such as the benefit corporation or flexible purpose corporation in California remain untested. These corporate forms, she says, seem to create a positive branding effect, which means a social entrepreneur could benefit by bringing immediate legitimacy to its brand with respect to their business practices. But more importantly, she challenges social entrepreneurs to not allow corporate form dictate business practices, saying that "these corporate forms provide the bare minimum for what a true social enterprise should aim to achieve."
  3. Take advantage of PRIs to raise capital. For-profit social ventures may want to look at program-related investments (PRIs), says Nicole Motter, attorney at Morris, Manning & Martin, LLP. Motter recommends researching private foundations with an aligned mission to inquire if they would be interested in making a PRI in the form of a loan or equity financing. "The foundation has a good shot of getting its investment back over time, and you (the social venture) have the capital you need to boost your impact. It's a win-win," says Motter. "If the foundation is new to PRIs, reassure them that PRIs bare little to no risk when done correctly, and an attorney knowledgeable on the topic could easily help ensure the transaction goes off without a hitch!"
  4. Stay current on legal developments. The legal landscape for social entrepreneurs is always changing. Zachary D. Kaufman, attorney and legal academic at Yale and Harvard, says that staying up-to-date will allow social entrepreneurs to seize valuable opportunities and avoid running afoul of the law. For example, Kaufman wrote in a recent article about the new Jumpstart Our Business Startups Act ("JOBS Act"), which contains a provision entitled "Capital Raising Online While Deterring Fraud and Unethical Non-Disclosure Act of 2012 ("CROWDFUND Act"). He says, "The CROWDFUND Act lessens existing regulatory obligations to enable businesses, including social enterprises, potentially to raise funds quicker and from a wider variety and greater number of sources." Kaufman offers two resources on where to keep up with social enterprise law: LawForChange.org and socentlaw.com.
  5. Include an attorney on your board. Social enterprise law is such a novel and multifaceted field, says Kaufman, and every social enterprise would be wise to include at least one experienced, well-connected attorney on its board. Attorneys can not only provide legal advice but draw upon their professional network to provide advice too.
  6. Focus on what's most important -- your impact. "Lots of start-ups and enterprises slap on the 'social enterprise' label because of its popularity without taking the time to understand what it means and how to achieve impact," says Plerhoples. She recalls meeting social entrepreneurs wanting to make an impact in sub-Saharan Africa without having ever stepped foot on the continent. To her, social enterprises are more about doing business as usual and then donating a percentage of profits to charitable causes. "That, to me, is corporate philanthropy. True social enterprise adopts social and environmental impact as its primary mission and then figures out a way to make that impact sustainable monetarily, not the other way around."