Short answer: it depends on your goal(s). If you want to maximize your profits and minimize your tax burden (keep as much of said profits as you can, but stay within the law), the correct answer will depend on your location (legal venue), the activities or mission of the company, and other single-bottom-line concerns. This article is for owners and entrepreneurs who are also seeking some sort of social and/or environmental impacts — also called the Triple Bottom Line.
In recent years, such companies have taken a variety of legal forms and structures in recognition of the desire to innovate, get recognized for caring about people and planet, and build healthy enterprises with staying power. Here we will touch on the most popular and useful ones. For the sake of clarity, this article will focus on only for-profit legal entities. For not-for-profit or “public benefit” entities, a valid but quite different business model, with no shareholding or unit-holding, please stay tuned for a follow-on article or look elsewhere. Here we focus on the for-profit world, with varying degrees of “public” benefit, social purpose or positive impacts beyond just profit, also called “blended value,” as the key to using market forces to scale, or what we and a few others call “impact capitalism.”
Profit maximization at the expense of people and planet has earned a dubious reputation that will gradually go the way of the dinosaurs, a future extinction event. (Let’s hope that happens before we wipe ourselves out, by harming the earth’s life-sustaining capacity.) Our intent here is to describe the emerging “impact economy” legal forms — types of companies that are used to advance flourishing natural, social, intellectual and financial capital.
Today this new path, conducting business for profit and impact, represents the largest investment opportunity of our era. Lasting value is being created through strategies, structures and profitable businesses that leverage the various forms of capital with non-conflicting demands for financial profits alongside social and/or environmental benefits. What was marginal in 2007 or prior to COVID is today becoming mainstream.
Most Widely Used and Understood Legal Structures for Owning a Business
A public benefit corporation (PBC) is a legal incorporation available only in certain US states* that allows organizations to identify a purpose beyond maximizing shareholder value. Becoming a public benefit corporation “protects mission through capital raises and leadership changes, creates more flexibility when evaluating potential sale and liquidity options, and prepares businesses to lead a mission-driven life post-IPO,” according to benefitcorp.net. Public benefit corporation legislation varies from state to state. To learn more about becoming a public benefit corporation, http://benefitcorp.net/businesses/how-become-benefit-corporation.
So-called “Social Enterprises”, Benefit Corporations or B Corps and PBCs are not mutually exclusive entities – an organization can be all three if they marry a social mission with a market approach, successfully complete the B Labs certification (see below for US-only alternative to B Labs, the Social Enterprise Alliance or SEA) and incorporate as a PBC in your US state. Likewise, an organization can be a Social Enterprise but not necessarily a B Corp or public benefit corporation, and vice versa.
Confused yet? There’s a bit more to consider … if you can stand it.
In some US states, there’s an entity called a Social Purpose Corporation (SPC), similar to a [Public] Benefit Corporation (PBC), lacking a profit motive as the main driver, and the new name for what was (2011-2015) a “Flexible Purpose Corporation”). SPC in CA became the new name for FPC on January 1, 2015.
Incorporation versus Liability Limited Companies
All of the above is in contrast to the more common Limited Liability Company (LLC), widely used as a holding company or Special Purpose Vehicle (SPV), so often the asset-owning entity in project finance. An LLC is a “pass through” entity, which means it is taxed like a partnership whereby the members (shareholders or unitholders) receive profits that flow through to their respective tax returns. The LLC itself does not pay corporate tax (because it is not properly a corporation), but the owners pay their own share of income tax based on funds they receive from their ownership carried interest.
Another, similar form to the LLC: Limited Liability Partnership or LLP. What’s the difference? In general, both of these entity types serve to separate business owners and their assets from their business, offering “limited liability” protection. Ask your legal counsel or tax advisor for details as this varies from state-to-state and should be carefully considered whether in the US or elsewhere.
* Benefit corporation legislation is effective in Arkansas, California, Colorado, Delaware, Florida, Hawaii, Illinois, Louisiana, Maryland, Massachusetts, Nevada, New Jersey, New York, Oregon, Pennsylvania, Rhode Island, South Carolina, Utah, Vermont, Virginia, West Virginia and DC. more
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