United States, Delaware

The most common for-profit organizational forms utilized in Delaware are the corporation and the limited liability company (“LLC”), which are well understood and traditional in nature. In many ways, they are similar, but LLCs can be disregarded for tax purposes, and so are advantageous to Enterprises that declare dividends and distributions, and they are also more flexible in terms of fiduciary duties and describing potential agreements among shareholders as to the company’s future.

• In addition, Delaware has available the Public Benefit Corporation (“PBC”) and the Public Benefit LLC (“PBLLC”), all of which are designed for Enterprises whose equity holders seek to build a unique, focused, and specifically-chosen mission into their organizational documents, where the company’s management will have obligations to pursue that mission in parallel to their obligation to maximize enterprise value. Generally speaking, these entities operate as modifications of the traditional corporation and LLC forms adopted by the state.

a. Enterprises that seek financing from investors and will have multiple owners tend to form corporations. It is certainly possible to work with LLCs that have many members and investor backing, but it is less standard. 

b. If not using a PBC or PBCLLC, Social Enterprises often use an LLC, as the LLC form is more flexible in terms of permitted modifications to fiduciary duties and business purposes, such that the members can mutually agree to operate in a manner consistent with their business’s values.

• Corporations: No requirement. Other considerations are permitted only to the extent they do not detract from shareholder value. It is not clear that shareholder pecuniary interests are always given primacy, especially when considering their long-term interests, they are given primacy in certain contexts (such as in the case of a sale of a corporation).
• LLCs: No requirement. Boards may be permitted to consider other factors extent specified in the operating agreement, but certainly, there is no requirement to this effect. 

Yes, the PBC and PBLLC.

PBC and PBLLC:

b. Materially differ from corporations/LLCs because management must consider specified mission (environmental, social, etc.) in addition to shareholder value when making corporate decisions. The special mission must be identified in the organizational documents agreed upon by the shareholders. Mandatory reporting requirements provide some measure of accountability and certainty to investors and strategic partners that the corporation is pursuing a social purpose. Any amendment or elimination of a public benefit specified must be approved by at least 2/3 of the outstanding voting stock.

c. Main benefit is that management can and must consider factors other than shareholder value, so shareholder profit is not the only guiding factor. This also makes the venture attractive to impact investors.

d. No such restrictions.

e. No timing or cost differences (though after formation, there may be cost differential to prepare the reporting).

f. The SPC form has been around for approximately eight years, the PBC form has been around for approximately seven years, and the PBLLC form has been around for two years. Three Delaware PBCs trade as public companies on NYSE and Nasdaq, suggesting increased market understanding and acceptance of the form.

Cooperative:

b. Cooperatives primarily differ from corporations and LLCs in that ownership is very inflexible and not based on investment amount. Cooperatives are defined by seven basic principles: (i) membership is open and voluntary; (ii) control is democratic on a one-member-one-vote basis; (iii) members participate in the financial gains of the entity; (iv) they provide education and training to members; (v) they are autonomous; (vi) they cooperate with other cooperatives; and (vii) concern for community is central.

c. The main benefit of this form is that it allows for alignment of worker and investor interests and provides favorable tax treatment of member distributions. Additionally, since it is worker owned, controlled, and managed, impact can be a primary consideration in decision making and operations.

d. There are no such restrictions.

e. No timing or cost differences.

f. This form is well known and has been available for quite some time.

Certain Social Enterprises are permitted to be formed and operated as Nonprofits; however, (i) they are not given any special treatment by virtue of being a Nonprofit, (ii) not every type of business venture may be eligible to form as a Nonprofit and (iii) Nonprofits that earn excess profits are subject to tax penalties. Thus, as a practical matter, not all Social Enterprises may form as Nonprofits. Social Enterprises that do organize as Nonprofits enjoy the same tax benefits as other Nonprofits and have the same burdens and restrictions, and there is no lesser reporting or faster formation process for Social Enterprise Nonprofits as compared to other Nonprofits.

Where their businesses fall in the category of activity permitted to Nonprofits, it is indeed very prevalent for Social Enterprises to form as Nonprofits.

N/A

If a Social Enterprise decides to organize as a PBC or PBLLC, they will be subject to reporting requirements that are not applicable to traditional corporations, as follows:

• PBC: No less than every two years, a PBC must provide its stockholders with a report on the corporation’s pursuit of its public benefit(s). The report must include (i) the objectives set forth by the corporation’s board of directors to promote the public benefits; (ii) the standards adopted by the board of directors to measure progress in promotion of the public benefit(s); (iii) objective, factual information based on those standards regarding the success of the corporation in meeting its public benefit objectives; and (iv) an assessment of the corporation’s success in meeting its objectives and promoting its enumerated public benefit(s).
• PBLLC : The reporting requirements for the PBLLC are materially the same as those for the PBC.

If a Social Enterprise decides to form as a Nonprofit or use one of the traditional Enterprise forms, they would not be subject to any additional reporting requirements by virtue of them being a Social Enterprise.

Since many of the Enterprise forms are new, there is not much case law on point. Many questions – such as what constitutes a public benefit, remain open.

No.

PBCs and PBLLCs may choose their mission, which tend to align with certain ESG factors.

No.

No major investor classes are required to look at ESG issues. While investors may be permitted to consider such factors, the state of play is in flux. Many are pushing for increased focus on factors other than profit motive and some guidance has in the past been issued allowing that, but in contrast, US regulators recently proposed a new rule that essentially discourages pension plans from considering environmental, social and governance issues when choosing investments. The proposed rule bars pension fund fiduciaries from investing in ESG vehicles when they understand that the underlying investment strategy is to subordinate return or increase risk for the purpose of non-financial objectives. 

That said, there are a number of private funds and large institutional investors that do consider ESG issues when making their investment decisions, and there has been a rise in impact funds that use ESG factors as part of an investment assessment process.

Social Enterprises receive grants, charitable investments, and traditional investments. The type of funding typically varies based on the Enterprise form that the Social Enterprise chooses. For example, Social Enterprises formed as Non-profits receive more grants and charitable investments, while Social Enterprises formed as for-profit corporations received more traditional investments. Social Enterprises utilizing one of the special Enterprise forms (i.e. PBC and PBLLC) have more success attracting philanthropic funding from private foundations and Nonprofit Enterprises. 

For-profit impact investments have been increasing in the United States and parties are becoming more familiar with them. Many prominent investors are forming specific impact funds (for example, affiliates of SoftBank, which manages the world’s largest venture capital fund, has recently formed the SoftBank Opportunity Fund).

There is no special government funding specifically available to Social Enterprises as such. Depending on the Enterprise form and industry, government grants, loans, bonds, and guarantees may be available. For example, the U.S. Department of Agriculture has grants available to for-profit small Enterprises.

Yes, Laureate Education is a PBC that is listed on Nasdaq. It became public in 2017 and was the first publicly traded public benefit corporation to pursue an IPO. Two other PBCs with prominent investor backing went public in the summer of 2020.

They are not required to disclose ESG factors, though some choose to do so for marketing reasons.

Impact bonds are utilized at both the federal level and the state level. The impact bonds are more prevalent at the state level than at the federal level, but overall are not very prevalent.

No.

Crowdfunding is legal, allowing small businesses and Social Enterprise to solicit investment from the general public. However, it is not used as a tool by most successful enterprises due to cost, restrictions (including a cap on the maximum investment amount) and ongoing reporting obligations.

There are tax exemptions available for Nonprofits generally, but there are no tax exemptions that are uniquely available for Social Enterprises structured using a for-profit organizational form.

Nonprofits (whether or not Social Enterprise) have two key tax exemption provisions, one being that they do not have to pay income tax themselves, and the other being that donors may take deductions on their reported income.

No.

No.

No.

No.

There are government grants and loan guarantees available for small businesses. The Small Business Administration, which administers many of these programs as well as much of the COVID-19 relief in the United States, also provides a number of resources such as articles and classes to help small businesses grow and operate.

Yes. PBCs and PBLLCs are required to produce annual reports assessing the company’s performance.  Reports for the PBC and PBLLC do not need to measure the Enterprise’s performance against a third-party standard, although many do. The PBC must provide a report to its stockholders, no less than every two years, describing the Enterprise’s pursuit of its public benefit(s).

No.

No.

Depending on the current processing times and whether the documents are filed online, in person, or by mail, it can take a couple days to form a legal entity in Delaware, but the state can accelerate that time frame if “rush” fees are paid.

The process to become a tax exempt Nonprofit typically takes between 3-12 months as the Internal Revenue Service, a federal agency, must approve the Nonprofit status application. 

No certifications afford beneficial tax status or other beneficial legal status, but certain certifications may help bolster the Social Enterprise’s social impact claims and provide potential investors and stakeholders with additional information to accurately assess the social impact that the Enterprise makes.

• B Corporation Certification: This certification is the most prominent, and is provided by B Lab, which is an independent Nonprofit Enterprise. To become a “B corporation” an Enterprise must:
  1. take and pass the B Impact Assessment;
  2. adopt the B Corporation legal framework, which requires that Enterprises incorporate certain provisions in their charter and governance documents;
  3. sign a term sheet agreement with B Lab; and
  4. pay certain fees.

To maintain the certification, B Corporations must pay annual fees and comply with ongoing reporting and compliance requirements.

• Product, Safety and Environmental Certifications: There are a wide variety of certifications available to Social Enterprises depending on the industry and purposes of the organization.

Yes, startups can easily form and flourish in the United States. They have a number of Enterprise forms available to choose from, there are relatively few reporting requirements for private for-profit businesses and incorporation processes are fast, cheap and simple.

Social Enterprises can form relatively easily if they want to organize as a for-profit Enterprise, but must go through a relatively lengthy application process if they want to form as a Nonprofit and take advantage of the tax benefits. One hard issue many Social Enterprises face is the simple choice of whether to be a for-profit or Nonprofit, particularly as there is no form of Nonprofit that is modified to accommodate Social Enterprises.

In the general corporate form, directors and officers must use their powers in the best interests of the company and shareholders. While they are not prevented from considering other interests, such as the environment or the larger community, it would be better were they more easily able to consider those interests.

In addition, the proposed rules for investment funds that discourage “impact” investing in Social Enterprises that do not prioritize financial return for investors is obstructive to Social Enterprises, in that without funding, Social Enterprises cannot flourish.

No.

1. Providing tax benefits to Social Enterprises utilizing for-profit Enterprise forms.

2. Expanding the scope of permitted activity for Nonprofits regardless of activity (even if the Nonprofits for certain activities did not have all tax benefits of other Nonprofits).

3. Revising rules governing fiduciary duties of corporations and investment managers to enable or require them to consider factors other than financial return.

4. Making crowdfunding easier, cheaper and more accessible to broaden public investment in Social Enterprises.

Implementing a uniform set of standards for ESG policies and reporting of public companies would make it easier for investors and consumers to compare and evaluate which enterprises are in fact doing good in the world, which would drive companies to perform better.

There are other ideas that are too “pie-in-the-sky” to implement in this country (for example, one could amend the corporate code to require that any publicly traded company have at least one director elected by the workers of the company, but this would not be a realistic change for our jurisdiction).

No.