Social Impact Legal Blog

There’s a confusing array of structures to choose from for a social enterprise.  A threshold question is whether you need a Not-for-Profit, or a For-Profit structure.  Sometimes you’ll need both.

Many people jump straight from business idea to “what structure do I need”? (or worse, business idea to buying an off-the-shelf company, without any thought about whether a company structure is going to do the job – it might, but it might not!)

Here are some prompters to get you thinking about key aspects of your business model.  These are important in order to figure out the right legal structure.  We’re going to do it the old fashioned way – follow the money!

How do you want to do good?

Or, put another way – what is your model for achieving positive impact?

• By giving away a % of profits, and/or
• Through the very products or services that your business delivers

Where will the money come from? 

Where are you planning to get money from, and what kind of money will it be?

• Philanthropic foundations
  • Grants
  • Loans
  • Equity
• Individual donations (do your donors need a tax deduction?)
• Investors looking for concessional or commercial returns

What will your obligations be with that money?

Which of these will work best for you and your business?

• Use it – as in the case of a gift or donation
• Acquit (report) – in the case of a grant or government funding
• Repay – in the case of a loan
• Pay a share of profits – in the case of equity investment

Do you need charity tax concessions?

Is your business model dependent on not paying income tax? What will work best?

• Set up as a charity
• Set up as a For-Profit and distribute to charities

What happens if your enterprise turns out not to be financially viable?

Which of these are you comfortable with?

• Lose your house (or other significant asset)
• Lose faith with grantors and donors, and other stakeholders
• Have an outstanding debt

What will you do with the profits?

Guess what, you do all of the following in a NFP as well as in a For-profit…!

• Give away a % to good causes
• Pay expenses including taking some as salary
• Retain some for growth of the business
• Share some with investors (In a NFP, you can’t share profits as such, but you can give investors a return on their capital in the form of interest on a loan.)

What happens in a bad year?

• Stop giving away a share of profits
• Just do less good if sales of your products or services are down

Resources

Need to do some more work on your business model?  Try strategyzer, and The Difference Incubator.

Check out this video, and Justice Connect’s guide to social enterprise structuring here.

If you’re already pursuing a specific social purpose through your business, you might be wondering what type of entity you should have set up – and what happens if you’ve chosen the wrong structure?  (Lucky you if you haven’t set anything up yet – you can start with a clean sheet of paper!)

If you’re a Not-for-Profit (NFP), you might be kicking yourself because now you can’t attract investors who want to invest for a share of the profits.

If you’re a For-profit (perhaps a Pty Ltd company, or a trust), you might be totally frustrated by all those people who keep saying that they’d happily give you money if only you were a DGR (Deductible Gift Recipient, meaning that donations to the organisation are tax deductible).

In Australia, we don’t have a special legal structure for For-profit businesses that want to make a particular social purpose an unchangeable feature of their enterprise.   Purpose-built legal structures (pardon the pun!) exist in other countries, such as the US and UK, but not here. In Australia, you need to choose either a for-profit, or a NFP, and sometimes you’ll need both.

So here are the 3 questions…

Question 1 – equity?

In order to be able to achieve scale, do you need to be able to attract investors who will provide capital in return for equity in your business (shareholders)?

Consider whether you might be able to expand by taking on debt rather than issuing shares.  If debt will work for you, then a NFP is a viable option.

But if your answer is yes, you will almost certainly need a for-profit.  In that case, you might consider adapting a standard for-profit company, to lock in the mission without turning it into a NFP.

If you’re not sure, it may be that you need to do some more work on your business model.  Take a look at The Difference Incubator and Strategyzer for some cool resources.

Question 2 – DGR?

Do you need to be able to accept tax deductible donations from individuals and/or grants from philanthropic foundations that can only give to a DGR?

If yes, you need a NFP.

(Some philanthropic foundations will give to for-profit businesses, but many can only give to DGRs (Deductible Gift Recipients)).

Question 3 – both equity and DGR status?

Did you answer Yes to both of the above?

If yes, you’re probably going to need one of each! It’s possible to have a NFP and a for-profit vehicle running side by side, but you need to be clear on the role of each and their relationship with each other.

For example:

• who will be on the boards (will one or more directors sit on both boards?)
• which entity will employ staff (maybe the NFP if it can access fringe benefits tax concessions)
• which entity will own the IP?

If you haven’t established your legal structure yet, then you have a blank piece of paper for designing the best legal structure to enable you to power up your impact over the longer term.