Social Venture Structures — A Balancing Act
Any startup looking to make a positive impact in the world needs to search for a structure that fits the mission of the organization and balances priorities.
Social ventures encompass a wide range of activities but at their core they are striving to accomplish a socially beneficial goal. Whether a traditional donation based charity or a socially oriented for-profit enterprise, each structure offers different advantages in helping a startup make a positive impact.
The most common organizational structures for social ventures are charities, non-profits, and co-ops. For-profit structures are not exclusively bound to a social mission, however they do offer certain advantages depending on the goals of the startup. Recent developments in the for-profit sector have created unique opportunities for combining traditional revenue generation with a positive social mission.
The table below offers a high-level overview of advantages and disadvantages to each type of structure.
Charities, non-profits and co-ops are all structured exclusively around achieving a social mission. The advantage is a clear public understanding of the organizations commitment to making positive change and holds the organization legally accountable to its social purpose.
Charities and non-profits also benefit from general tax exemptions. These forms of organizations are generally exempt from income tax and property tax. Registered charities have the added benefit of being able to issue donation receipts that enable donors to receive tax recognition for charitable gifts. This is particularly useful in attracting public donations.
However, charities and non-profits fall short on flexibility in attracting different forms of funding. Charities are limited to raising capital through public donations, government grants, and grants from other charities. Since non-profits cannot issue receipts, they cannot raise capital through public donations and cannot receive grants from charities.
The charities advantage of having an exclusive social mission has the consequence of restricting business activities. Charities therefore lack the flexibility to pursue other revenue opportunities that would otherwise provide profit to fuel further growth and a larger positive impact.
On the other side of the social venture spectrum, the primary function of a for-profit organization is to generate financial returns for the shareholders. The shareholders have an economic right to the profits of the company and elect the board of directors that oversee the activities of the organization.
A traditional for-profit structure is not legally held accountable to any social mission, therefore it is challenging to communicate a genuine social mission. In addition, the primary function of generating financial returns for the shareholder can create potential conflict in priorities with any social mission.
Despite the limitations, for-profit structures do have some advantages for social ventures.
A corporation can engage in a wide range of activities thereby granting it flexibility to pursue revenue opportunities to fuel the growth of the business. This advantage is particularly useful in helping a startup adapt to its ecosystem and gain traction for its positive social mission, despite the potential lack in grant funding or public donations.
Another advantage of a for-profit structure is the flexibility in raising capital. Though a corporation cannot accept charitable donations, it can issue shares and debt instruments that attract investors. This flexibility allows a startup to quickly scale the business and gain traction for its social mission.
An increase in Corporate Social Responsibility (CSR) programs and standards initiatives such as ISO 26000 are transforming the for-profit social venture landscape. Certified B-Corp status and Benefit Corporations are now bridging the gap between generating financial returns and committing to a social mission. I will discuss the ongoing for-profit social venture developments in subsequent blog posts.
When deciding upon a structure for a social venture it is important to ask yourself what is the fundamental purpose of your startup? Making money and having a positive social impact are not mutually exclusive, however knowing which of these two factors is the main driver of your business will help determine the best arrangement for your organization.
Ultimately the structure determines how the social venture will be perceived by the public and how capital will be raised. It will also influence the culture of the organization and the type of talent and investors that it attracts.
Taking the time to choose the proper framework for your social venture will ensure that your organization aligns with your vision for a positive social impact.