INDEV 308: Introduction to Social Entrepreneurship
Class 6: Operational, HR and Legal Considerations
Monday, June 13, 2011
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Instructors: Norm Tasevski ([email protected]) Karim Harji ([email protected])
© Norm Tasevski & Karim Harji
© Norm Tasevski & Karim Harji
Agenda
• Greyston Bakery • HR Considerations • Operational Considerations • Legal Considerations • Guest Speaker – Mary McGrath (Small Change
Fund) • What did we learn? • Next Week
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HR Considerations…
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Where does HR Fit?
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A Caveat…
Think of your HR from the perspective of “running a business”, not “running a charity”
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© Norm Tasevski & Karim Harji
A Second Caveat…
Your HR Strategy must align with your business model and align with organizational values
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What if you were a…
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Product-based, for-profit Social Business…!
“Purpose-built”, non-profit Social Enterprise…!
“Fee-for-service” Social Business…!
“Virtual” Platform…!
© Norm Tasevski & Karim Harji
What If you were a…. Product-based social business!
• Types of Employees?
• Volunteers?
• HR/volunteer management?
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© Norm Tasevski & Karim Harji
What If you were a…. Purpose-built social enterprise?!
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• Types of Employees?
• Volunteers?
• HR/volunteer management?
© Norm Tasevski & Karim Harji
What If you were a…. Fee-for-service Social Business? !
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• Types of Employees?
• Volunteers?
• HR/volunteer management?
© Norm Tasevski & Karim Harji
What If you were a…. Virtual platform? !
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• Types of Employees?
• Volunteers?
• HR/volunteer management?
© Norm Tasevski & Karim Harji
Other HR Considerations…
• Who/what do you need?
• How do you find the right people?
• How do you define what they do?
• How (and from where) do you pay them?
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© Norm Tasevski & Karim Harji
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Exercise: What HR Strategy makes sense for…!
Your venture???!
© Norm Tasevski & Karim Harji
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© Norm Tasevski & Karim Harji
Balancing Financial and Social Tensions
• “Social cost”
• Business acumen
• Two missions – may lead to confusion/conflict
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© Norm Tasevski & Karim Harji
Summary: Key Questions
• Who will manage the business? • How do you plan to staff the venture? • Will staff require special training or accreditation? • Will the non-profit’s clients be hired? If so, are there any special
accommodations that will require additional staff or other resources? • Will staff work on contract, for honoraria, or on a permanent basis? • Do you have a person with business experience and/or training on
staff and how will that person be utilized? • Does the staffing plan match your operational needs and revenue
growth projections? • How will the staffing needs change as the enterprise grows? • Are any of the positions transitional by design? If so, how will the high
turnover rates be accounted for in the enterprise? • How easy will it be to attract qualified staff with anticipated working
conditions and salaries? • What is the organizational chart? What is the accountability of each
staff member? Source: http://www.enterprisingnonprofits.ca/sites/www.enterprisingnonprofits.ca/files/uploads/SEGUIDE_Web_Chapter_Five.pdf 17
Operational Considerations…
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© Norm Tasevski & Karim Harji
How do you… Operationalize your Value Proposition?!
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Your venture???!
© Norm Tasevski & Karim Harji
How do you… Operationalize your “Customer” function?!
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Your venture???!
© Norm Tasevski & Karim Harji
How do you… Operationalize your Channels?!
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Your venture???!
© Norm Tasevski & Karim Harji
How do you… Operationalize your “Relationships” function?!
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Your venture???!
© Norm Tasevski & Karim Harji
How do you… Operationalize your Key Resources?!
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Your venture???!
© Norm Tasevski & Karim Harji
How do you… Operationalize your Key Activities?!
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Your venture???!
© Norm Tasevski & Karim Harji
How do you… Operationalize your Partner Development?!
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Your venture???!
© Norm Tasevski & Karim Harji
Summary: Key Questions
• How will you operationalize each segment of the business model?
• How will you ensure that you adequately understand and capture your considerations and assumptions?
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© Norm Tasevski & Karim Harji
Some Resources: MaRS workbooks
1. Building an A-Team • What values do you seek in new hires? • As the company grows, what new hires will you need and when? • What skills do successful employees at your company require? • What qualities do your employees need to make them excellent? • How should you screen and interview to find the best candidates? • How do you make an official offer of employment? 2. Compensation • What forms of compensation are most effective for a start-up? • How do I structure my employee stock option plan? • What benefits am I legally required to provide and how much will they cost? • How do I build a realistic and comprehensive HR budget?
3. HR at Work • How do I effectively bring new people on board? • How do I establish and conduct performance reviews? • What are the essential HR policies and procedures I need to have in place? • How do I create an effective employee handbook?
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Legal Forms Applicable to Social Enterprise…
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© Norm Tasevski & Karim Harji
A Caveat…
There is no defined (national or provincial) legal form for social enterprise in Canada
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© Norm Tasevski & Karim Harji
A Second Caveat…
Form follows function
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For-Profit Corporation!
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Non-Profit Corporation!
Charity!Partnership!
Sole Proprietorship!
Co-Operative Corporation!
© Norm Tasevski & Karim Harji
For-Profit Corporation!• Incorporated under the Business Corporations Act (Ontario) (the “OBCA”)
or the Canada Business Corporations Act (federal) (the “CBCA”)!• With share capital!
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• Most flex in terms of profit-making activities!
• Can access all forms of investment (debt, equity, etc)!
• Provides clarity of purpose (i.e. the financial bottom line)!
• Limited personal liability!
• Pay corporate tax!• Cannot access grants!• Cultural/
psychological barriers with operating a “for-profit social business”!
© Norm Tasevski & Karim Harji
Charity!• Incorporated via Letters Patent under the Corporations Act (Ontario) or
Canada Corporations Act (federal)!• Without share capital!
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• Don’t pay corporate tax on earnings!
• Can issue tax receipts!
• Can access many government/foundation/corporate grants!
• Least flex in terms of profit-making activities!
• Limited in the types of investments you can access (e.g. equity)!
• Time-consuming!!• Psychological barriers
with operating a “social business”!
• An aversion to “risk taking”!
• Can lose status if “too successful”!
© Norm Tasevski & Karim Harji
Sole Proprietorship!• Registered via Business Names Act (Ontario) or Canada Corporations Act
(federal)!• Without share capital!
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• The simplest (and quickest) legal form!
• You have full control of business decisions!
• Flexibility to make business decisions quickly!
• No separate filing for income tax!
• Unlimited liability!!!• The business is the
entrepreneur!• Hard to find investors!• Limited creative input
(i.e. you’re the only one with ideas!)!
• Less “professional” than other forms!
© Norm Tasevski & Karim Harji
Non-Profit Corporation!• Incorporated via Letters Patent under Corporations Act (Ontario) or Canada
Corporations Act (Federal)!• Generally without share capital!
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• Can access grants!• Can access debt
financing!• Tax exempt as long
as organized and operated for defined social/community benefit!
• Some NPs are more open to (limited) risk-taking!
• Can’t issue tax receipts!
• Limited in the types of investments you can access (e.g. equity)!
• Psychological barriers with operating a “social business” !
• Can lose status if “too successful”!
© Norm Tasevski & Karim Harji
Partnership!• Registered under the Partnerships Act (Ontario)!• With or without share capital!• Usually organized using a Partnership Agreement!
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• Similar benefits to sole proprietorship!
• Combines skills/competencies of two people!
• Can sign contracts and borrow money in its own right!
• For most partnerships, unlimited liability! (at least in Canada…)!
• Acrimony between partners is common!
• Difficult to find investors!
© Norm Tasevski & Karim Harji
Co-Operative Corporation!• Incorporated under the Co-Operative Corporations Act (Ontario) or Canada
Cooperatives Act (Federal)!• Wither with or without share capital!
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• Well-established structures!
• Integrates the concept of “community benefit” already!
• Cannot issue tax receipts!
• Generally not exempt from paying tax!
• Psychological barriers with operating a “social business”!
• Difficulty making decisions (too many people at the table)!
© Norm Tasevski & Karim Harji
Exercise: Which legal form makes sense for…!
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Your venture???!
© Norm Tasevski & Karim Harji
CRA Guidelines
• Direction (law, regulations, guidelines, precedents) around social enterprise are not completely clear
• Community economic development (CED)-specific exemptions: – Relief of unemployment: training business. – Relief of poverty through operating stores: business that
provides low-cost necessities. – Relief of people with disabilities: “social business.” – Relieving suffering in economically challenged
communities
• Federal view of the business activity may differ from any provincial position
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© Norm Tasevski & Karim Harji
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© Norm Tasevski & Karim Harji
An Evolving Conversation…
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Hybrid Structures
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Talk to a Lawyer!
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Legal Innovations…
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© Norm Tasevski & Karim Harji
Legal Innovation: CIC (UK)
• Established to trade (goods or services) for the community good
• Requires “community interest statement” application to the CIC Regulator. Publically-available annual reports required to confirm (adherence to) community interest requirement
• May issue shares in order to raise capital • Cap on returns (dividends paid) set by the Regulator • Subject to an “asset lock”
– Assets and profits must be permanently retained by the CICs for community benefit, or transferred to another CIC subject to an asset lock, or to a charity
• Taxed in the same manner as other businesses
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© Norm Tasevski & Karim Harji
Legal Innovation: L3C (US)
• Variation on American Limited Liability Companies (LLCs) • LLC investors are members rather than shareholders • Terms of the operating agreement guarantee the public
benefit nature of the entity’s work • Like LLCs, L3Cs are not subject to federal income tax
themselves, but the income they pay to members is taxable according to the rates applicable to each member
• Able to attract private capital through the sale of shares and other securities, various forms of loans, or other commercial financial arrangements.
• Ability to receive Program Related Investments from foundations
• No asset lock and no dividend cap
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© Norm Tasevski & Karim Harji
Legal Innovation: B Corp (US)
• To be certified as a B corporation under the B Lab system, the corporation must: – Achieve a minimum score of
80 (out of 200) on the B Ratings System, a tool to assess a company's social and environmental performance.
– Agree to make legal changes to its articles of incorporation to expand the responsibilities of the company to include consideration of stakeholder interests.
– Pay B Lab an annual licensing fee.
– Recertification is required every two years.
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© Norm Tasevski & Karim Harji
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© Norm Tasevski & Karim Harji
Summary: Key Questions
• Is the venture’s primary mission mostly social or profit? • What are the founders’ views, skills, motives, and
intentions? How closely held is the organization? • What is the market for the primary activities (goods/
services)? • How much money is needed and where will you get it? • What level of risk and liability is your organization willing
to take?
• What will be the relationship between the enterprise and the parent organization? Will the enterprise be a separate entity? What is the governance structure of the enterprise (separately and in relation to the parent organization)?
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Break
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© Norm Tasevski & Karim Harji
Guest Speaker - Mary McGrath
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© Norm Tasevski & Karim Harji
What did we learn?
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