Another benefit of this hybrid structure is that the for-profit subsidiary can attract mission-driven investors, while the nonprofit maintains its ability to receive donations without jeopardizing the nonprofit’s tax-exempt status. The nonprofit corporation, however, can be adapted for some social enterprise purposes by creating a for-profit subsidiary that generates profit to fund the nonprofit corporation. That code section requires the organization to operate primarily for charitable or public benefit purposes, and prohibits profits to be earned for the benefit of any private individual or stakeholder. The nonprofit corporation has the most regulations to consider in conducting income-generating activities. The defining feature of a nonprofit corporation is its tax-exempt status, which is governed by federal Internal Revenue Code Section 501(c)(3). Nonprofit Corporation (with a For-Profit Subsidiary).
Lastly, a social enterprise may also operate as an unincorporated company such as a sole proprietorship or general partnership and obtain a third-party certification of its commitment to addressing social and environmental problems. A social enterprise may also use adapted forms of the nonprofit corporation, the limited liability company, and the traditional corporation to fit its objectives. California has two corporate forms specifically designed for social enterprises, the Benefit Corporation and the Social Purpose Corporation. Rather, this article is a general discussion of the main issues associated with each entity form, such as tax consequences, management structure, corporate governance, liability protection, and ease of obtaining financing from outside investors.Ī social enterprise based in California has six main options to choose from. This article does not address all of the issues and considerations that a social entrepreneur should consider in making the most appropriate choice for their company for that legal counsel should be consulted. This article is intended to be a general overview of entity choices available for social enterprises looking to form an entity in California.
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