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The Double Legal Structure

The Double Legal Structure

You are not your legal structure.

Your value as a social enterprise is not dictated by whether you’re “For Profit” or “Not For Profit”
Whether or not you’re a social enterprise is based on your impact, irrespective of whether you call it a donation or a dividend.

You can be “For Profit”, then funnel your profits towards your cause.
You can sell products that are good for the environment, or run services that employ marginalised people.

You can be a “Not For Profit” that loses money and doesn’t end up creating much change.

“So if we don’t have to be Not For Profit, what should we be?”

Firstly, I am not a lawyer, and this is not legal advice.
I’ve helped set up a fair few enterprises, so this is simply my personal belief and experience.

Be whatever gives you the biggest advantage.

If you want to make the most of philanthropic grants, you might want to become a Not For Profit, and see if you can get Deductible Gift Recipient (DGR) status.
That means, donors get a tax deduction if they give you money – a powerful incentive.

You also may choose to be a NFP for credibility purposes – in some industries it’s the only viable option.

If you want to grow the business through investment, you probably want to be a For Profit company.
This allows individuals to own part of the company, and therefore share in the profits that the company makes.

That means, you can sell part of the company to an investor, and use that money to massively expand the business, thereby creating more impact.

You can also choose to donate a certain portion of your profits back to your cause, so when the business does well, it fuels more good work.

Image: Old El Paso

Image: Old El Paso

There’s another option – a hybrid legal structure that gives you both.

This means you register two entities: one For Profit and one Not For Profit.

The For Profit arm owns the assets (e.g. all your valuable stuff), and when the assets make money, the profits go back to this arm.
You can sell shares to an investor, and raise money to buy more assets.

The Not For Profit arm runs your impact work.
It makes no profit, has no shareholders, and can accept grants and donations.

Here’s the first crucial detail: Money only flows in certain directions.
Donor money ONLY goes towards impact, NEVER to an investor.

The second crucial detail: The Not For Profit arm owns shares in the For Profit arm.
That means, when the business makes money, the Not For Profit arm gets a good chunk of the benefits.

The third crucial detail: The For Profit arm pays the Not For Profit arm a management fee for running the day-to-day elements of the business.
That means even if the business makes zero profit, the Not For Profit arm is still funded, and will make positive social change.

This system sounds complicated, but once you wrap your head around it, it makes a lot of sense.

It allows you to take donations – which fully go towards impact.
It allows you to take investment – and pay the investor a fair return
The impact arm benefits from the success of the business – win/win

This model was first demonstrated by STREAT, and later by Team Wild.
Each have two parts of the business, which help them avoid compromise and underperformance.

Here’s my (not legal advice) suggestion: Talk to a good lawyer, one who understands social enterprise.
Pick whichever legal structure works for you, and don’t be afraid to have two structures at once.

To find out more about STREAT's legal structure, have a look at the Social Venures case study here

 

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