Social Enterprise

Table of Contents

1. Foreword 3

2. Legal Review 3

3. Legal Structures: Marrying Business and Social Interests 4 3.1. HowDoYouDecideontheLegalForm? 5 3.1.1 DecidingontheMostAppropriateLegalStructure 5 3.1.2 IsItReallyLegal? 7 3.2. HowDoNon-ProfitEntitiesFitintothePicture? 7 3.3. SpecialConsiderationforCharities 9 3.3.1 ShouldWeApplytoBecomeaCharitableOrganization? 10 3.3.2 CRAandCharitiesConsidering“BusinessActivities” 10 3.4. WhatAretheFor-ProfitOptions? 12 3.5. ToSeparateorNottoSeparate,ThatIstheQuestion 14 3.5.1 StayingIn-House,NoSeparation 16 3.6. SeparateEntities 16 3.6.1 WhollyOwned,For-ProfitSubsidiary 16 3.6.2 SubsidiaryCompanywithaPartner 16 3.6.3 LimitedPartnership 16 3.6.4 JointVentures 17 3.6.5 Co-operative 17

4. Contact Information and Resources 17

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1. Foreword

Areyouthinkingaboutsettingupasocialenterprise?Startingasocialenterpriseisacomplicatedprocess.Organizationsandindividualscanexpecttofacemanyissuesastheyplananddevelopasocialenterprise.The Business Linkhaspublishedaseriesof threeguidestohelpyouaddresstheseissues.

Choosing a Legal Form for Your Social Enterpriseisoneof theseguides.Itwillhelpyoudealwithaverychallengingissue:figuringouthowtostructureyournewsocialenterprise.Thisguidewillgiveyouanoverviewof thelegalcontextof yoursocialenterprise.Anditwilltakeyouthroughsomeof thestepsinsettingupthelegalstructure.

Theotherguidesavailableinthisseriesare:

• Starting a Social Enterprise in Alberta• Financing Your Social Enterprise

Togethertheguidescoverthebasicsof startingasocialenterprise,butthereisstillmuchmoretolearn.Youwillfindalistof resourcesattheendof eachguide.Formoreinformation,youmightalsowanttolookupthereferencesprovidedatthebottomof eachpage.

Youcanfindthesethreeguidesinthesocialenterprisesectionof www.cbsc.org/alberta.Inadditiontothethreeguides,The Business Linkmaintainsacollectionof socialenterprisematerialsinourlibrary.VisitorcallThe Business LinktoexploreourSocial Enterprise Pathfinder—a listing of social enterprise materials, resources, and external supportorganizations.

2. Legal Review

Whenlaunchingyoursocialenterprise,aswithanybusiness,thereareanumberof legalitiesandgovernanceissuesthatyouneedtoaddress.Oneof thefirststepsistoreviewthelegal,financial,andadministrativeframeworksthatgovernyourcurrentorganization.Howyouareorganizedintheseareastodaywillaffectthenatureof yournewventure,soitisimportantthatyouunderstandthemearlyon.

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If yourcurrentorganizationisconsideringstartinga‘for-profit’venture,youmustreviewyourarticlesof incorporationtodetermineyourcurrentlegalstanding.Inordertopreventcostlyanddifficultcomplicationsdowntheroad,attheoutsetyoushouldalsolookatyourbylaws,missionstatement,charitablestatus,etc.If possible,reviewtheselegaldocumentstogetherwithyourorganization’slawyer.Thesedocumentswillhelpyoudecideif thereareanylegalissuesthatmightgetinthewayof startingasocialenterprise.Forexample,youmightdiscoverthatyourorganization’sobjects(theaimsstatedinyourby-laws)donotallowyoutoownproperty,borrowmoney,orengageinbusinessactivities.Youmightdiscoverthatyoudonothavecharitablestatusandcannotissuecharitablereceiptseventhoughyouareanon-profitsociety.

Onceyouunderstand theboundaries, if any, thatyourcurrent legal structurehas,youcanexploreoptionsfor:

• starting a venture• creating subsidiaries• entering into partnerships

Youshouldalsoensurethatyourorganizationmaintainsitscharitableornot-for-profitstatusingoodstandingwiththeCanadaRevenueAgency(CRA).(Itispossibletoamendby-lawsif youneedtodoso,butmostorganizationsprefertoleavethatoptionasalastresort,particularlyif proposedchangesmaycausetheCRAtoreviewyourcharitablestatus.)

3. Legal Structures: Marrying Business and Social Interests

Inthissection,wewill lookat thevariousstructuresthatcanbeusedtoformacompany.Oneoptionistoestablishatraditionalbusinessmodel;thismeansthattheentitywilladoptoneof themore traditionalcorporatemodels that for-profitenterprisesuse.Another is toconsidermodelsthataremorecommonlyadoptedbysocialorganizations. Eachapproachhasitsprosandcons,someof whicharelistedhere.Becausetheimplicationsof structurearesoimportant,especiallywhenconsideringtheimportanceof keepingcharitableornon-profitstatusthatissoimportanttomanyorganizations,itisrecommendedtoseeklegaladviceduringtheplanningstage.

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1CynthiaGair, If the Shoe Fits, Nonprofit or For-Profit? RobertsFoundation, 2006, pp. 8–9. Seehttp://www.redf.org/download/other/REDF_If_the_Shoe_Fits_FINAL.pdf

3.1. How Do You Decide on the Legal Form?

There is noonepreferred legal structure for any and all social enterprises.Starting a Social Enterprise in Alberta,includesexamplesof socialenterprisesthathavedifferentlegalforms.Belowaresomeof thelegalformsusedbyenterprisesinAlberta:

Exploreanumberof differentoptionswhendecidingwhatlegalstructurewillbestsuityourenterprise.Forexample,afor-profitstructurerequirestheorganizationtofocusonmakingaprofit.Italsohastaximplications.However,anon-profitstructureincreasesthepressure to tacklecomplexsocialproblemsandmaydivert theorganizationawayfromcreatingneededprofitsorsustainability.Socialenterprisesarehybridorganizationswhereprofit is required toattain thesocialgood, so theseoptionsbringusback to thebasicquestion:“Whatisthebestwaytoachievethemissionof thisenterprise?”Or,“Whichoptionwillsupportthismissionbest—afor-profitoranon-profitlegalstructure?”

TheRobertsFoundation,a leader in socialenterprise funding, suggests that“decisionsaboutstructureshouldflowfrommission”.1Anorganization’smissionmaybe100%socialor100%profit,orsomekindof mix.Whereisyourorganization’smissiononthesocial–profitcontinuum?

3.1.1 Deciding on the Most Appropriate Legal Structure

Whenyouareclearaboutyourcentralmission,youcanmake theconnectionbetweenmissionandstructure.Youranswerstothefollowingfourquestionswillhelpyoudecidewhatstructureismostappropriateforyourventure:

Is the venture’s primary mission mostly social or profit?Isprofitthemostimportantmotiveforthebusiness?Isthesocialmissionthemaingoalof theenterprise?Consideringtheanswertothesequestions,willafor-profitoranon-profitstructurebethemostnaturalfit?

�Choosing a Legal Form for Your Social Enterprise

CosmosBottleDepot Non-profitcorporationownedbyaregisteredcharity

EarthWater Privatelyheld,for-profitcorporation

KidsintheHallBistro Aprograminitiatedbyaregisteredcharity

SOCIALENTERPRISE LEGALFORM

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�Choosing a Legal Form for Your Social Enterprise

What are the founders’ views, skills, motives, and intentions?Whyaretheseindividualsstartingtheventure?Whatpathisitalreadyon?Toknowwheretheventuremightgo,ithelpstoknowwhereithascomefromandwhatthefoundingindividualsarebringingtoit.

What is the market for the primary activities (goods/services)?Whoare yourpaying customers?Are they thepeople you are trying tohelp?Thepublicat large?Orisyourmarketanorganization(e.g.,a levelof governmentorafoundation)thatwillpayyoutoservelow-incomecustomers?If itisthelatter,youwillneedtoconsiderthecontractingrequirementsof thatorganization.

How closely held is the organization?If asmallnumberof individualsownanddirectanorganization,itiscloselyheld.Acomplexcombinationof socialandprofitobjectivesismostlikelytosucceedwhenfewerindividuals,withcommonpointsof view,ownanddirecttheenterprise.2

Otherfactorstoconsiderasyoulooktoamodeltoadoptinclude:3• Howmuchcontroldoesyourorganizationwanttomaintain?• Howbigwilltheenterprisebe?Howmuchandhowfastcanitgrow?• Howmuchmoneywillyouneedandwherewillyougetit?• Whatlevelof riskandliabilityisyourorganizationwillingtotake?• Whateffectcouldtheenterprisehaveonyourorganization’simageand reputationinthecommunity?Willothersbelievethatyourenterpriseis competingunfairlywiththeprivatesector?

The Roberts Foundation provides an assessment tool to help you determine the legalstructurethatbestfitsyouraims.4(Thefoundationmakesitclearwhatitbelievesaboutcharitable organizations: a “tax-exempt nonprofit legal structure is the best fit forsupportingsocialmission-focusedactivities”.)

2CynthiaGair,If the Shoe Fits, Nonprofit or For-Profit?RobertsFoundation,2006,pp.8–9.http://www.redf.org/download/other/REDF_If_the_Shoe_Fits_FINAL.pdf 3EnterprisingNon-Profits,TheCanadianSocialEnterpriseGuide,2005,p.141.4http://www.redf.org/download/other/REDF_If_the_Shoe_Fits_FINAL.pdf

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3.1.2 Is It Really Legal?

Itisindeedlegalforanon-profitorco-operativetocreaterevenuebyoperatingasocialenterprise.Although, if youare also a charitableorganization, some restrictions apply.This sectionwillhelpyouunderstand the legalcontext inwhichyouoperate. Anon-profitcompanyorcharitymaynotcreateexcessprofitsandstillexpecttoretainitsstatus.Itisacomplextopicandwesuggestthatyoudiscussthisinmoredetailwithyourlawyerandaccountant.Thissectionwillexplainsomeoptionsandconsiderationswhenyouaredecidingwhetherandhowtolaunchasocialenterprise.

3.2. How Do Non-Profit Entities Fit into the Picture?

Notallnon-profitorganizationshavethesamelegalstructure.Non-profitstatusdoesnotautomaticallyallowyou tooperateanon-profitbusinessorprovidecharitable receipts.Aswiththelegalstructurespreviouslylisted,non-profitscantakenumerousforms.Forexample,asocietymayhavecharitablestatusandmayalsoownanon-profitcompany.Socialenterprisesarenormallyhybridorganizations,soitisimportantthatthebusinessandthesocialentitiesarelegallycompatible.

Anon-profitorganization’smainpurposeisasocialgood—notthepursuitof profitforitsownsake.Neitheranon-profitsocietynoranon-profitcompanycandistributeanyof itsprofitstoitsmembers;theprofitsthatarecreatedaretobeusedforthesustainabilityof theorganization.If asocialenterpriseisownedbyaparentorganization,theactivitiesof thesocialenterprisemustmatchthestatedobjectsof theparentorganization—society,charity,ornon-profitcompany.Remember,theCanadaRevenueAgencywilllookcloselyatanyregisteredcharitythatengagesin“businessactivity”.

Seethefollowingchartforanoverviewof themajorsimilaritiesanddifferencesbetweenthelegalstructuresof non-profitorganizations.Notethatacharitymustfirstincorporateasasocietybefore registering forcharitablestatus.Therefore, therules thatapply toasocietyalsoapplytoacharity.

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Can only engage in anarrowrangeof activities,thosethat•advancereligion•relievepoverty•advanceeducation•orfulfillother purposesthatthe courtshavedetermined tobecharitable5

Exists to provide anorganizational form forpeoplewhowishtocarryoutsomepurposethatisnotatradeorbusiness.

A non-profit society isentitled to carryonanylawfulactivity,solongasitdoesnothavemakingprofitasapurpose.

Canapplytoregisterasacharity.

An Alberta non-profitcompany has the powerto carry on a trade orbusiness so long as theprofits or surplus arenotmadeavailabletothemembers.Inthatwayitislikeasociety.However,itsstructure and operationsare like those of othercorporations.

Cannot apply to registerasacharity.

REASONFOREXISTENCE(Purpose)

SOCIETY NON-PROFIT COMPANY

Legal Structures of Non-Profit Organizations in AlbertaCHARITY

RegisteredasacharityunderIncomeTaxAct(Canada).

Governed by theSocietiesAct(Alberta).

Governed by theBusiness CorporationsAct(Alberta).

LAW

Muststateexplicitobjects(sayexactlywhattheorganizationaimstodo)intheby-laws.

OBJECTS Anorganization’sobjectsmustqualifyitforcharitablestatus.Alltheactivitiesof theorganizationmustfurtheritscharitablepurposes.

Exempt*Exempt* Exempt*INCOMETAX

YesNo NoISSUEDONATIONRECEIPTS?

DISTRIBUTIONOFINCOME

Cannotdistributeincometomembersduringitslife.Cannotdistributeassetstomemberswhenorganization isdissolved(anyassetsmustbetransferredtoanothernon-profit).

Canreceivegrantsfromfoundations.

Can operate the socialenterprise as aprogramratherthanasabusiness.Eliminates theneed foranotherentity.

Creates a separate entitythat shields the owner(s)from liability. Uses atraditional businessstructure, which mightmake it easier to raisefinancing.

BENEFITSFORSOCIALENTERPRISE

*EnsurethatyoufollowallguidelinesasestablishedbytheCRA5Onlythoseactivitieswhichhaveapublicbenefit.It is importanttorememberthatthereareaseriesof legaltestsabouteachof thesecharitablecategoriesof charitablepurpose..SeeCRA’sBrochureRC4143 Registered Charities: Community Economic Development Programshttp://www.cra-arc.gc.ca/E/pub/tg/rc4143/rc4143-e.htm

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3.3. Special Consideration for Charities

Beforeacharitystartsasocialenterprise,itwillneedtoconsideraspecialsetof rules.TheCanadaRevenueAgencyacceptsfourkindsof charitableobjects(purposes):

•relief of poverty•advancementof education•advancementof religion•otherpurposesbeneficialtothecommunity

Anorganization’sobjectsmustclearlyalignwithatleastoneof theabovebeforeitmayqualifytheorganizationtobeacharity.Furthermore,thecharity’sfullrangeof activitiesmustsupportitscharitablepurposesandbeconsistentwiththem.

Acharity’sbusinessactivitiesmustbeclearlylinkedtotheorganization’scharitablepurpose.Asocialenterprisewouldlikelyconnecttoa“relief of poverty”object.If thecharityfailstomaketheconnectiontothisobject,theorganizationcouldloseitscharitystatus.6

TheCanadaRevenueAgency(CRA)recognizesfourtypesof linkstoanorganization’sobjects:

•abusinessactivitythatisnecessarytotheoperationof thecharitableprograms•anoff-shootof acorecharitableprogram•auseof excesscapacity(resourcesalreadyavailablebutnotyetfullyused)•thesaleof anitemthatpromotesthecharity(EnsurethatyoufollowallguidelinesasestablishedbytheCRA)

InordertocomplywithCRArules,charitiesmustdistinguishbetweenrelatedandnon-relatedbusinesses.Arelatedbusinessisoneinwhichthebusinessislinkedtothecharity’spurpose,subordinatetothatpurpose,and/orrunmainlybyvolunteers.

Asubordinateactivityisonethat:representsasmallportionof thecharity’sresourcesandisintegratedintothecharity’soperationsandisdrivenbytheorganization’scharitablemotivesanddoesnotallowprivatefinancialbenefit

If thesocialenterprisedoesnotmeetallthecriteriamentionedabove,itcannotoperateaventurewithinacharitablestructure.However,acharitableorganizationcanownandoperateanunrelatedbusinessventurethatisseparatelyincorporated.7BecarefultofollowtheCRA’srulesregardingwhetherornotthebusinessisasubordinateactivity.Failuretocomplycanresultinarevocationof charitablestatus.

6PeoplewhoarethinkingaboutsocialenterpriseandcharityshouldreadandstudytheCCRABrochureRC4143RegisteredCharities:CommunityEconomic Development Programshttp://www.cra-arc.gc.ca/E/pub/tg/rc4143/rc4143-e.htmandCharities Providing Rental Housing for Low-Income Tenants-http://www.cra-arc.gc.ca/tax/charities/policy/cps/cps-020-e.html7EnterprisingNon-ProfitsProgram,TheCanadianSocialEnterpriseGuide,2005,p.130.

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NotethattheCanadaRevenueAgencycananddoesmakechangestoitsregulations.BesuretochecktheCharitiesDivisionof theCRAwebsite(http://www.cra-arc.gc.ca/tax/charities/menu-e.html)forwhat’snewandhowchangesmightaffectacharityoperatingasocialenterprise.

3.3.1 Should We Apply to Become a Charitable Organization?

Right now you may be asking yourselves: should we apply to become a charitableorganization?If youalreadyareacharity,youmaybeconsidering:shouldweoperateasocialenterpriseunderourcurrentlegalstructure?Orshouldwesetupaseparateentity?

There aremany factors to considerwhen answering these questions.Charitable statussignificantlyrestrictswhatanorganizationcando.Thislimitationcomesinexchangefortax-exemptstatusandtheabilitytoissuedonationreceipts.

Inonesense,thedecisiontobecomearegisteredcharity(ortooperateunderaparent-charity)hingesonthemainsourceof fundingyouintendtouse.Thedecisiontoapplyforcharitablestatusmaybeeasyif youcanansweryestoboththesequestions:

•Willcharitabledonationsbeyourmainsourceof revenue?•Willtheorganization’sactivitiesandprogramsbe100%charitable?

Whatif yourprogramsandprojectscanonlybepartiallysupportedbycharitabledonation?Whatif someof theproposedactivitiesarenon-charitable?Thenthedecisionbecomesmorecomplex.Youwillneed toweigh theadvantagesanddisadvantagesof charitablestatus,especiallythese:

• Advantages:Charitiesmayreceivedonationsandmayreceivegrantsfromfoundations.•Disadvantage:100%of acharity’sprogramsandprojectsmustbecharitable.

Youwillalsoneedtolookattherelationshipbetweenyourcharitableorganizationandtheactivitiesyouareplanning.

3.3.2 CRA and Charities Considering “Business Activities”

Isyourorganizationacharity?Doyouwantyourcharitytooperateasocialenterprise?Thenyourcharitywillbedoing“businessactivities”.DoyouknowwhattheCRAallowscharitiestodo?

The following decision treewill help you understandwhat theCRAdoes and doesn’tallow.Answerthequestionsforeachactivitythatyouareconsidering.Followthetreeasfardownasyoucan.Stopwhenabranchends.

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8AdaptedfromEnterprisingNon-ProfitsProgram,TheCanadianSocialEnterpriseGuide,2005,p.147.

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CRA Decision Tree for Charities Considering “Business Activities”8

If NO...Activityisn’t a business.Activityis permittedunderCRAguidelines.

If YES...(tobothquestions)Activityis a business.

Answer BOTH these questions:Doesthisactivityinvolveearningrevenueinexchangeforprovidinggoodsand/orservices?ANDDoesthecharityintendtoprofitfromtheactivity?(The CRA will look at history of profits and the way the activity is structured.)

If NO...Activityis a businessthatmayormaynotberelated.

NEXT question:Istheincomeearnedthroughthesaleof goodsthathaveallbeendonated?

If YES...Activityisn’t a businessbecausebusinessesdon’tdependondonationstocreateinventories.

If YES...Activityisdefinedas“carryingon”a business.

NEXT question:Istheincome-earningactivitycarriedoutonasystematic,regularbasis?

If NO...Activityisn’t a business.Example:fundraisingevent

If YES...Thecharityiscarryingona related business.TheCRAallowsthis.

NEXT question:Arethepeoplewhoarerunningthebusinesssubstantiallyall(90%)volunteers?

If NO...Thebusinessmaybeunrelatedtothecharity.

If NO... (toeitherquestion)Thecharityiscarryingonan unrelated business.Theorganizationmightloseitscharitablestatusunlessthebusinessishousedoutsidethecharity’slegalstructure.

If YES...(tobothquestions)Thecharityiscarryingona related business.TheCRAallowsthis.

NEXT 2 questions:Arethebusinessactivitieslinkedtothepurposeof thecharity?ANDDothebusinessactivitiescomeunderthepurposeof thecharity?

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3.4. What Are the For-Profit Options?

Traditionally,youcancarryonabusinesswithinthreetypesof for-profitlegalstructures:• the sole proprietorship• the partnership• the for-profit corporation

Another structure is theco-operativemodel.Co-operativescanbeeither for-profitornon-profitorganizations.Insomecases,youmaywanttoconsidergoingtoa‘for-profit’model.Beforemakingadecision,youwillwanttolookatanumberof factorsaffectingyourbusinesssuchas:

• the nature of the businesso E.g.Anorganizationthathasafocusontrainingunder-skilledworkersmay havedifficultydesigningafor-profitenterprisesotheymaychooseanon-profit model.Whereasanorganizationthatcreatesandsellsaproductmayusea for-profitmodel.

• the financial situation of the people starting ito E.g.If theorganizationislesslikelytoqualifyforaloan,theymaypartnerup withotherproponentswhohavemoney.

• your goals for the businesso E.g.Anorganizationmaywishtobringtogetheragroupof like-minded individualswhoarewillingtoparticipatewiththeirfinancesandtaketimeto evolvetheconceptof anewbusiness.Thisorganizationmaychoosethe membership-focusedco-operativemodel.

• other personal and financial factorso Thismaydependonfactorssuchastherisk.Forinstance,theproponents maychosetolimittheirliabilitybychoosingtoincorporateratherthansetting upapartnership.

The following table gives information about each structure. The last row shows howa social enterprisemightworkwithineachstructure. More informationabouthow toregistereachtypeof businesscanbefound inThe Business Link’sGuide for New Alberta Businesses.

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9KimAlter,SocialEnterpriseTypology,2004,p.40.Availableat:http://www.virtueventures.com/setypology.pdf

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3.5. To Separate or Not to Separate, That Is the Question

Asocialenterprisecanoperateasaprogramof alargerorganization.Itmightalsobesetupasaseparatenon-profitorfor-profitcompanyownedbyaparentorganization.Finally,theenterprisemighthaveno“parent”; it isan independent legalentity. Thefollowingdiagrams show the possible relationships between the social enterprise and a parentorganization.9

Thesocialenterpriseisadepartmentorprogramof theparentorganization.Theenterprisehasnoseparate,financialorlegalstatus.Allstaff,overheadandmanagementsystemsareintegrated.

PARENTORGANIZATION

SOCIALENTERPRISE

Internal Program

Thesocialenterpriseisownedbytheparentorganization.Legally,andfinancially,itisaseparateentity.If staff orofficespaceisshared,itisdonesobycontractonabusinessbasis.

PARENTORGANIZATION

SOCIALENTERPRISE

Separate Entity

Thereisnoparentorhostorganization.Thesocialenterpriseisaseparateentitywithitsownlegal,financialandmanagementsystems.

SOCIALENTERPRISE

No Parent – Only One Entity

Whenyouareconsideringtheappropriatestructureforyoursocialenterprise,anumberof issuesrelatedtocontrolandprofitarise:

•Whowillmakeultimatedecisionsfortheenterprise?(i.e.,wheredoescontrolrest?)•Whoownstheenterprise?•Whowillreceivetheprofits?•Whowillbeliableforanylosses?

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Youwillneed todecidewhetherornot tohouse theenterprise in aparentnon-profitorganization. After you make this decision, a whole new set of possibilities will arise.These include legal and taxoptions.Youwillwant a lawyer and a goodaccountant toadviseyouonthebestlegalandtaxoptionsforyourenterprise.

Aparent non-profit organizationmust decidewhether to operate the social enterprisewithintheexistingstructureortocreateanotherstructurethatisrelatedorconnectedtoitinsomeway.Thefollowingtableillustratessomebenefitsanddisadvantagesof separatingthesocialenterprisefromtheparentnon-profitorganization.

SEPARATE THE STRUCTURE

•Doesnotdistractmanagement(andcan beruntomaximizeprofit).•Keepsprogramfocusedonitspurpose.•Reducesbureaucracy.•Iseasyfordonorsorinvestorstoseeand understand.Inspiresconfidence.•Shieldsthenon-profitorcharityfrom businessrisk.•Enablesinvestmentinthebusiness(i.e., afor-profithasmoreoptionsforraising investmentcapital).•Maybesoldtoinvestors,employeesor anothercompany(aseparatebusiness canbesoldoutrightasanexitstrategy).11

•Doesnotdistractmanagement(andcan beruntomaximizeprofit).•Keepsprogramfocusedonitspurpose.•Reducesbureaucracy.•Iseasyfordonorsorinvestorstosee andunderstand.Inspiresconfidence.•Shieldsthenon-profitorcharityfrom businessrisk.•Enablesinvestmentinthebusiness(i.e., afor-profithasmoreoptionsforraising investmentcapital).•Maybesoldtoinvestors,employeesor anothercompany(aseparatebusiness canbesoldoutrightasanexitstrategy).

BENEFITS

DO NOT SEPARATE THE STRUCTURE

BENEFITS AND DISADVANTAGES of Separating the Social Enterprise from the Parent Non-Profit Organization10

•Parentorganizationmightlosecontrol.•Someresourcesmustbeduplicated betweenenterpriseandparentnon- profit.•Formingaseparateentitycanbe expensive.Administrationandlegalcosts maybehigh.

•Purposeof theparentorganizationmay bediluted.•Parentorganizationassumesliabilityfor enterprise.•Taxexemptstatusof parent organizationmightbejeopardized.

DISADVANTAGES

10SomeofthistablewassummarizedfromCenterforCommunityFutures,ProfitMakingforNon-ProfitsandSocialEnterpriseToolkit,pp.3-13–-3-14.11Pepin,TranquadaandAssociates,SocialEntrepreneurship:AReferenceGuide,2004,WestOrange,NJ.

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3.5.1 Staying In-House, No Separation

Most Canadian charities operate their social enterprises as in-house programs, so theyavoidtheneedforaseparateorganization,boardof directors,financialstatements,etc.Thisapproachworkswellwhen:

themissionof thecharityisverycloselyalignedtothesocialenterpriseandtheworkof theenterpriseiswellintegratedintotheoveralloperationsof thecharityandtheenterpriseisfocusedonbreakingevenratherthanmakingaprofit

3.6. Separate Entities

Somebusinessmustbeseparatedfromtheirparentnon-profit,andsomearebestseparated.Charitiesarenotallowedtooperateunrelatedbusinessesin-house.Relatedenterprisesthathaveaprofitmotivearenormally separated.Belowarefivepossiblekindsof separateentities.

3.6.1 Wholly Owned, For-Profit Subsidiary

Asocialenterprisecantaketheformof acorporationthatisowned,andcontrolled,byanon-profitorganization.Thisapproachallowsforaclearseparationbetweenthecharityandthecorporation.Forexample,thecorporationmusthaveadistinctnameanditsownboardof directors.Noneof thecharity’sassetscanbeusedtobenefitthecorporation.

Becauseitisacorporation,theenterprisecandistributeprofits.Corporationearningswillbetaxable.

3.6.2 Subsidiary Company with a Partner

The non-profit society can be the majority shareholder in a company that has othershareholders.Theothershareholdersmaybenon-profitorfor-profitentities.Thiscomplexstructurewillallowforinvestmentsfromothersources.Alsoitwillspreadriskamongalltheshareholders.However,itwillalsocreateitsowntensionsaroundgovernance(boardof directors)andmanagement(operations).

3.6.3 Limited Partnership

Somepartnershavelimitedliability.Theremustbeonegeneralpartnerwhoremainsliableforallthedebtsof partnership.Thepartnershipagreementmuststatewhoisliableforwhat.

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3.6.4 Joint Ventures

Jointventuresareavariationof apartnershipwherecontrolissharedequallyamongshareholdingpartners.Thedetailsof theseoperationsareoftenoutlinedinpartnershipagreements.

3.6.5 Co-operative

Aco-operativeisaformof corporationthathasruleslimitingitsgovernance.Eachmemberhasonlyonevote,nomatterhowmanycapitalsharestheyown.

Regardlessof thetypeof separateentitychosen,besuretheentitybestsuitsyourneedsandthatyouhaveaddressedallthepreviouslyidentifiedimplications.

4. Contact Information and ResourcesCanada Revenue Agency’s Publications

Social enterprises and charities•RC4143ERegisteredCharities:CommunityEconomicDevelopmentPrograms

Thispublicationcoversthefollowingtopics:CommunityeconomicdevelopmentdefinedUnemploymentandemploymentWhoistheorganizationhelping?PreventingunemploymentTypesof programsVocational,employability,andentrepreneurialtrainingTraining“businesses”

Registering a charity•T2050ApplicationtoRegisteraCharityundertheIncomeTaxAct•T4063RegisteringaCharityforIncomeTaxPurposes

Operating a charity •IT110R3GiftsandOfficialDonationReceipts•IT111R2AnnuitiesPurchasedfromCharitableOrganizations•IT297R2GiftsinKindtoCharityandOthers

Other Web-Based InformationCanadianCo-operativeAssociation,BCRegion.Co-operativesandCharityLaw:www.bcca.coop/pdfs/Co-opCharityLaw.pdf

Caftel,Ben.LegalStructuresforBusinessVentures:http://www.tgci.com/magazine/97winter/legal1.asp

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