Social entrepreneurship in the United States can be carried out by commercial and non-commercial organizations, as well as through the establishment of a special state agency (through the adoption of a separate law at the state level), whose activities should be aimed at the implementation of any large-scale social project.
In the USA there are 2 systems of recognition of commercial organizations as a social enterprise:
- Special types of commercial organizations are used for the purpose of social entrepreneurship: L3C and Benefit Corporation. These types of commercial organizations are derived from LLC (Limited Liability Company) and Corporation, respectively. Thus, two types of social enterprises are defined: a low-profit limited liability company “L3C” and a social corporation (“benefit corporation”).
- Certification of enterprises by a specialized non-profit organization “B Lab”, which recognizes the fact that the company conducts socially beneficial activities and assigns to it the status of “B Corporation”.
It should be noted that many organizations, which by right can be considered as social enterprises, do not pass certification and do not receive the status of a social enterprise. This is due to the associated difficulties, material and time costs for the enterprise.
Low-profit limited liability company (L3C)
L3C is a hybrid form of private sector enterprise, which combines two main purposes – solving social problems and making a profit.
L3C belongs to the LLC (limited liability company) group. L3C status was first established in Vermont in 2008. For 2014, commercial LLCs can obtain L3C status in the states of Illinois, Louisiana, Maine, Michigan, North Carolina, Utah, Vermont and Wyoming. There are plans to amend L3C legislation in 26 more states in the near future.
Proponents of the separation of all LLCs into a separate group of low-income companies argue that this way it is possible to attract significant investments.
Let us consider the main characteristics of low-margin companies:
- Purposes of creation and activities
Implementing charitable or educational initiatives. Profitmaking is also the goal of a low-profit company (but not the primary one), but such activities should take place exclusively through the realization of charitable goals; - Primary Provisions.
Commercial organization, general provisions for the organization and operation of limited liability companies apply; - Organizational structure
Like the LLC management system, the profit distribution and ownership structure of L3C companies is flexible and can be adapted to the policies and needs of the company; - Obtaining L3C Status
As with an LLC, the procedure for obtaining L3C status is an application to the state agencies at the local level. Each state sets its own requirements for companies seeking L3C status. In some states, an organization may be automatically granted L3C status without applying for status itself. The cost of establishing an L3C varies from State to State. Generally, the main costs are the legal costs of preparing the documents; - Funding.
Private and stock investments; - Taxation.
Despite the basic social mission of the activity, L3C is not exempt from taxation;
Disadvantages of low-income companies:
- No significant increase in investment has been identified.
- The original goal of providing easier access to small business financing programs has not materialized.
- No tax advantages over traditional LLC.
Social corporation (benefit corporation)
In April 2010 the state of Maryland passed a law creating a benefit corporation. As of January 2014, the following states can establish Benefit Corporations: California, Hawaii, Illinois, Louisiana, Maryland, Massachusetts, New Jersey, New York, Pennsylvania, South Carolina, Vermont, Virginia, Washington.
The basic features of a social corporation:
- Activities must be socially beneficial, which in turn constrains the corporation’s desire to maximize profits.
- The duties of directors to make decisions solely in the interests of the corporation (but not only in the interests of shareholders), as well as the responsibility of directors for decisions made to third parties – those who should benefit socially. Accordingly, directors do not traditionally have a heightened responsibility to shareholders to ensure the profitability of the company.
- Reporting. Publication on the official website of the corporation’s annual report, which contains information on the implemented projects, an assessment of their social benefit and environmental impact, as well as their positive meaning for society.
- Taxation: does not have an advantage over regular corporations.
Example of Benefit Corporation: the company “Loyal Lable” is a hybrid of commercial and non-commercial organization, a brand associated with socially conscious lifestyle. Besides commercial activity (record company), “Loyal Label” produces seven lines of T-shirts, a part of funds from their sale is used to finance specific projects with partners – charitable organizations.
Certification and rating system
Due to the lack of legislation on social entrepreneurship on the federal level, many companies try to present themselves as social enterprises, as this helps to attract investments and the demand for the services and products of the enterprise on the market. In this connection, in the last five years standardized certification systems and rating scales of significance of socially beneficial enterprise activities have been actively formed. Certification and ratings are implemented not on the state level, but within the framework of non-profit organizations’ activities.
A company that has been certified or has received a favorable rating can provide potential investors with information about socially significant activities and their results. By obtaining transparent data on a company’s activities, investors are able to choose the right company for them, and for companies with a high rating it is easier to raise funds.
There are a number of rating agencies and certification programs available to a social enterprise. But there is no universal, legally accepted rating system and certification, so any enterprise, regardless of its organizational structure, can be considered by a rating agency and apply for certification. Besides, the way the information submitted by an enterprise can be verified is only from open sources. The state does not allow agencies to obtain information about the activities of businesses if, under state law, this information can be withheld.
Among all the rating and certification agencies, a non-profit organization “B Lab” stands out, which recognizes the fact that a company conducts socially beneficial activities. Enterprises that have successfully passed certification of “B Lab”, are assigned the status of “B Corporation”. B Lab” also maintains an open rating of social enterprises, the rating is available online on the website of the organization.
The main features of “B Corporation” are:
- commercial organization;
- The purpose of creation and activity – rendering of positive material influence on a society and environment;
- annual submission of a mandatory report (published in the media) on socially beneficial activities and their results;
- the necessity of undergoing certification and obtaining the status of “Certified Corporation B” (confirmation that Corporation B is really a commercial organization and that its activities are really aimed at achieving socially beneficial effects) by a specialized non-profit organization called B Lab;
- in contrast to obtaining Benefit Corporation status, businesses with any organizational structure can apply for B Lab certification (not just corporations);
- The annual fee for B Corporation ranges from $500 for companies with annual revenues to $500 for companies with annual revenues. B Corporation annual fee ranges from $500 for companies with less than $2 million in annual revenue to $25,000 for companies with less than $2 million in annual revenue. The annual fee ranges from $500 for companies with annual revenues under $2 million to $25,000 for companies with revenues over 100. The annual fee ranges from $500 for companies with more than $100 million in annual revenues to $25,000 for companies with more than $100 million in revenues. B CORPORATION.
A company’s decision to be rated and certified by B Lab is based on compliance with four criteria:
- Environmental protection (production of environmental goods, use of recyclable raw materials and renewable energy sources, etc.);
- Protection and observance of employees’ rights (compensation and benefits provided to employees; work organization features);
- Support for local communities aimed at solving socially significant problems;
- Compliance with the reporting system.