3 min read
Many social entrepreneurs find that neither a for-profit entity nor a non-profit entity fully meets their needs and find a way to combine these. If these entrepreneurs don’t operate in a country that offers a hybrid corporate form, their best alternative might be to set up two entities, both a for-profit entity (to raise investment) and a non-profit (to raise donations). This is called a dual legal structure.
In the dual structure, you incorporate both a non-profit entity and a for-profit entity. These are set up as two legally separate and distinct entities:
- The for-profit entity focuses on commercial activity and can raise investment to fund this activity.
- The non-profit focuses solely on non-commercial activity and raises funding solely from philanthropy.
Usually, the for-profit uses some or all of its profits to support the non-profit. In this case, this structure is being used as a way for the non-profit entity to get extra funding from business activities by receiving some or all of the business profits coming from the for-profit entity.
See the diagram below for an illustration of how a dual legal structure works:
To make this structure work, there must be distinct activities conducted by each entity. The for-profit only conducts commercial activities such as selling goods and services. On the other hand, the non-profit should limit itself to charitable activities solely.
For example, consider a healthcare social venture that sells medicines, but also provides free training to local doctors. The sale of medicines is an activity that should be conducted by the for-profit entity whereas the local doctor’s training could be done through the non-profit entity. This means that the doctor’s training can either be funded by charitable donations or by the sale of medicines.
One of the biggest advantages that comes with this set-up is that you can raise funds from both philanthropists and investors without having to convince them that the funds will be going to the right function because they are separate entities. On the other hand, the disadvantage of this is that this set-up requires a lot of work as you will need 2 teams of staff and two sets of annual accounts among other functions that need duplication to keep up two legal entities. Therefore structuring your social enterprise this way is only appropriate if your social mission genuinely comprises distinct activities that can be split out into commercial and non-commercial activities, and where both are significant parts of your work.
If your social enterprise fits the features listed above, the use of a dual legal structure can help you sustain your positive social impact for longer. The for-profit entity generates cash flow that can be used to fund the non-profit entity ensuring that it has enough capital to continue operating and producing positive social outcomes.
For more tips on social entrepreneurship check our our Social Investment Toolkit.