The New Frontier In Social Entrepreneurship

Written by on November 28, 2011 in Entrepreneurship - 1 Comment


For many years, entrepreneurs with a social agenda were faced with a choice: either make their business a non-profit, and sacrifice the ability to more easily generate wealth, reinvest, and expand, or go the for-profit route, thereby making their charitable goals less credible in the eyes of consumers and potential investors. It was a stark either-or. The two structures, after all, were drawn on the assumption that social causes were inherently distinct from capitalistic ones. An entrepreneur either wanted to help people or make money – but never both.

These days, though, there are a couple options available to bring that gap between non-profit and for-profit. With most large corporations operating a charitable arm, and with humanitarian causes often being orchestrated through for-profit businesses like Facebook and Twitter, according to social media monitoring analysts, it would seem as though this change has come from the top down – from big businesses rather than from entrepreneurs. Yet, this is not the case. The two main in-between profit structures – the hybrid model and the L3C – have, rather, been molded and influenced by small business people and by regional governments.

The L3C model allows businesses to incorporate as a limited liability corporation with a “low-profit” agenda. Such businesses are governed by set rules that dictate what amounts to a middle-of-the-road approach to profits and social causes. The corporation can have shareholders that receive a profit on their investments, but it must have a significant charitable cause that it targets and promotes. Production of income is not allowed to be a central company objective.

Instead of walking a fine line between income and social goals, the other model – the hybrid model – seeks to accomplish both of these at the same time. It does this by incorporating two distinct corporate arms: one a non-profit charity and the other a for-profit organization. The two arms have different tax structures and abide by different federal regulations, but the for-profit side of the business can take income and channel it into the charitable cause. This approach is popular among start-ups and small businesses. One of the more recent uses of the model, for example, is demonstrated by Janji Running, a start-up that produces running shorts. The company’s non-profit arm seeks to take earnings from its for-profit counterpart and then dedicate them to combating malnutrition and water shortages in countries around the world. In this manner, Janji can allocate a set percentage of every short sold to charitable causes without being limited by an L3C model.

Both approaches, however, provide welcome alternatives to the deep distinctions traditionally drawn between profit and charity-driven objectives. If these models grow in popularity and prove successful, then perhaps entrepreneurs dedicated to social causes can more easily grow and expand their business – and further that cause in the process.

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  • Rick Zwetsch

    This may be a matter of semantics but —- L3Cs do not “incorporate” as a limited liability “corporation”, they organize as a limited liability company. The L3C is NOT a “corporation” and does not have “shareholders” per se. The L3C is a  company that has members just like a traditional LLC and is generally taxed like a partnership when there are two or more members. Members share in profits and losses according to the terms of their membership agreements.

    Rick Zwetsch, Principal Partner
    interSector Partners, L3C
    L3C #39 in the US | L3C # 1 in Colorado