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Mitchell Kutney

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The Lay of the Land for Social Entrepreneurs

Posted: 12/23/2013 3:14 pm

Social entrepreneurs are struggling to function within the legal system laid out before them. This is because the formal legal structures designed for social entrepreneurs are too complex and still fairly novel. Most entrepreneurs are opting to go for the low-hanging fruit, like the basic Limited Liability Company (LLC) rather than jumping through the legal hoops of these new structures, such as the Benefit Corporation or L3Cs. These are still under utilized, most likely because of arduous reporting requirements, and the limited financial resources of startups for more in-depth legal advice. There is also a real gap in market incentives for bothering with such modern structures; after all, what is the value to shareholders, investors and markets? If the organization is having a positive impact and creating profitable returns, does anyone really care about their legal structure?

An example of a social enterprise that opted to bypass these newer structures is one in New York City, Gradian Health Systems, which chose to structure itself as a Single Member Limited Liability Company (SMLLC; also referred to as a "disregarded entity"). While this type of structure can be broadly applied, it is notably available to social entrepreneurs working closely with foundations, where the organization is considered an autonomous entity funded by the foundation's program-related investments portfolio. SMLLCs may be beneficial to some social entrepreneurs tackling gaps within society that align with a foundation's mission. With regards to the previous example, a New York-based private family foundation that supports programs to improve access to health care innovated on the conventional SMLLC by founding Gradian Health Systems, whose mission is to equip hospitals in low-resource countries to deliver anesthesia safely and economically by improving access to safe surgery and preoperative care through technology, service and training. They have been addressing what has been referred to as the "neglected stepchild of global public health." The stepchild in this case is emergency and essential surgery (EES), which remains a low priority on global health agendas. Improving EES entails effectively providing surgical and anesthesia care in developing countries where there are serious shortages of trained anesthesiologists, as well as severe infrastructure challenges (with 40 percent of machines being broken at any one time). This lack of EES is one of the contributing reasons why an estimated 300,000 women still die globally as a result of pregnancy or childbirth.

Gradian Health Systems has been manufacturing and distributing their Universal Anaesthesia Machine (which does not require electricity or compressed oxygen to function) and providing education and training for some time now, which is something that typically would be accomplished by a donation-dependent 501(c)3 organization (charity). However, through social innovation and investments in market-based solutions, they have been making a positive impact on global health, while self-financing their own growth beyond the base level funded by their parent foundation. Though they are currently structured as a SMLLC, they easily could fit into a Benefit Corporation structure and gain the protection to prioritize their social mission over earning profits (i.e., not be sued by investors for not maximizing profits). However, the case for jumping through the legal hoops and taking on the additional reporting requirements is difficult to make without any incentives or established record of demonstrating an increased return on investment.

State governments took the right step by introducing social enterprise legal structures, but have been dragging their feet on providing the necessary supports for the effective implementation of these new structures. In order for social enterprises like Gradian Health Systems to continue to grow in numbers and accomplish the collective goal of a more sustainable economy, these innovative legal structures need to have more incentives and be more accessible to startups.

 

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