New legal structures for social enterprises

posted in: Social innovation | 0
Fitting the misfit.

Fitting the misfit or just an empty promise?

Laura Claus
Laura Claus, PhD student, Cambridge Judge Business School

Social enterprises are a misfit. Neither simply for-profit, nor non-profit, they don’t belong in the existing legal categories of the NGOs or financial hunters of today’s world. Stuck in the middle of wanting to achieve both, earn profits and make a positive social impact at the same time is a difficult undergoing on its own. But people not knowing how they should categorise you as a social entrepreneur comes with many additional struggles: Investors confusing you with charity models, different types of stakeholders pulling you toward one or the other objective, or prospective employees being puzzled about who you are as an organisation.

‘Fitting the misfit’

Operating in the grey area, however, may be coming to an end. New legal structures, such as Benefit Corporations (BC) and L3Cs in the US, as well as Community Interest Corporations (CIC) and Social Enterprise Limited Partnerships (SELLP) in the UK are spanning the boundaries of existing legal frameworks, starting to create a new sector for their own.

Despite variations across these evolving structures, they have several aspects in common. The new legal structures offer flexibility for entrepreneurs to address multi-stakeholder demands without having to constantly justify themselves for operating in-between objectives. In other words, these new legal frameworks are fitting the misfit, allowing social entrepreneurs to embrace their place in between the social and financial logic. This not only overcomes the difficulties of a blurred image, but also helps organisations with a dual-purpose to redefine their hybrid identity. More fundamentally, it may thereby eliminate the long-standing paradox between doing good and generating profits.

Though, this version of new legal structures fitting the misfit is a romanticised one. Not to forget, there are incentives to (re-)incorporate as a BC, L3C, CIC, or SELLP – may it be tax breaks or a simple branding exercise, social entrepreneurs may have different motives to convert. Assuming that not every entrepreneur is in it just for the noble cause, combined with the fact that legal conversion costs and administrative efforts are low, the emerging, so-referred-to ‘fourth sector’ of social hybrid organisations becomes increasingly diluted. Originally designed to fight ‘green’ or ‘social washing’, the sector may indeed forfeit its purpose by rather facilitating such practices, at least for some organisations. These factors are, however, not the only concern.

Uncritically jumping on moving trains

What’s more, because the new business models for the social enterprise elite are considered innovative and even ‘revolutionary’ in the open press, they, in their own right, have become an attractive business. In an effort to jump on the moving train, it has led many organisations to start offering their own social standards and certification services. As a result, consumers, investors, and other kinds of stakeholders are not only asked to distinguish between the different legislative forms, but further are challenged to know the difference between, for instance, a B Corp (organisations that are B Lab certified) and a Benefit Corp (organisations that legally incorporated their social mission).

One could argue that there simply may not be one single solution in terms of legal and certification frameworks to fit the various types of social enterprises that have evolved over many decades now, however, the tremendous hype that new legal structures have caused in the media, academia, and the professional world should at least be contemplated critically. At the end of the day, legal structures provide frameworks. For these not to become an empty promise, it should be kept in mind that the actual task – the juggling of differing objectives – still remains an ongoing accomplishment over time.

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