As a social innovator, what form of legal entity should you adopt?

3 min read

Social innovators face many complex legal questions. These start as soon as you launch: what kind of legal entity should your venture be? A for- profit or a non-profit? How should your venture be governed? How can you create a legal structure that safeguards your social mission for the long- term, even after you take on new shareholders with their own values and agenda?

The challenge for social innovators is that most legal systems are not designed for social businesses. Generally there are one set of rules for charities and another set of rules for commercial businesses. Charities can raise donations and enjoy tax benefits but are often constrained from running commercial activities or raising investment. Businesses can raise investment but may be shut off from philanthropic capital, which is often the only available funding fuel for the early stages.

What happens if you are a social business, an organisation that uses a business model to achieve a social outcome? Social businesses often fall down the middle. To succeed, you will need to be creative to blend the various options that are available, so that you can adopt a legal structure that can fully meet your financing needs.

Fortunately many of the social entrepreneurs that we’ve worked with have done just that. Some have even found ways to blend several legal options, creating structures that are capable of raising both donations and investment. In the sixth module of the Social Investment Toolkit, we show you how they did it.

Legal structure is concerned with the type of legal entity that you choose to incorporate as. This might be as a for-profit, a non-profit or in some cases a hybrid combination of the two.

In our toolkit, we show you the pros and cons of each option, as well as presenting two further options for you to consider: the hybrid legal entity (a special legal form designed for social enterprises which is only available in some countries) and the dual structure (where you incorporate both a for-profit and a non-profit). We go in depth in particular into how dual structures work as for many social ventures this is the best option to combine the benefits of both nonprofit and for-profit despite the added complexity of running two legal vehicles. 

Head to our Social Investment Toolkit website to download module 6 for free.

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