A Novel Approach to Using LLCs for Quasi-Charitable Endeavors (A/K/A 'Social Enterprise')

Abstract

“Social enterprise” is on the rise. Popularly defined, social enterprise means using traditional business methods to accomplish charitable or socially beneficial objectives. Social enterprise is quasi-charitable. It is a hybrid. It is neither entirely profit driven nor entirely philanthropic.

Many individuals today boast that they are “social entrepreneurs” running “social enterprises,” yet there is no universally accepted legal definition of the term “social enterprise.” Further, there is no single legal entity that customarily is used by the typical social entrepreneur. New legal entity forms are emerging for social enterprise (e.g., L3Cs, B corps, benefit corporations, etc.), but even these new forms generally prove inadequate in one or more respects, particularly their income tax treatment.

As a result, social entrepreneurs and their advisors have had to adapt and improvise with respect to their legal entity needs by using multiple organizations acting in concert to accomplish blended philanthropic and commercial endeavors. These multiple entity structures often are referred to as “contract hybrids” and usually involve collaboration between a for-profit entity and a nonprofit entity. Moreover, due to their inherent flexibility, liability protection, and malleable tax treatment, limited liability companies increasingly play a role in these for-profit/nonprofit contract hybrid structures.

This article goes a step further by proposing a novel contract hybrid structure that uses multiple LLCs acting together to pursue a hypothetical social enterprise project. The proposed structure relies heavily upon the flexible nature of the LLC, particularly the LLC’s ability to accommodate competing legal rights and duties among members with very diverse objectives. Furthermore, the keystone to the contract hybrid structure described in this article is a relatively recent Internal Revenue Service Information Letter that permits private foundations to make grants directly to wholly-owned LLC subsidiaries of public charities. The author postulates that using multiple LLCs acting together as described in the article combines the best attributes of both the for-profit and the nonprofit legal entity forms for entrepreneurs desiring to organize and operate a typical social enterprise.

The article proceeds in four parts. Part I sets forth a hypothetical social enterprise project. Part II summarizes the principal advantages and disadvantages of using a nonprofit entity to pursue the project. Part III summarizes the principal advantages and disadvantages of using a for-profit entity to pursue the project. Finally, Part IV describes the new, proposed contract hybrid LLC structure that potentially reconciles the competing for-profit and nonprofit capital and other demands of the hypothetical project.

Keywords: social enterprise, social entrepreneur, L3Cs, LLLCs, LLCs, limited liability companies, charitable objectives, charity, quasi-charitable endeavors, corporations, benefit corporations, business law, philanthropy, foundations, public charities, nonprofits, taxation, tax

JEL Classification: K19, K20, K29, K34