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FAQ: What Legal Structure Should My Social Enterprise Be?

This is a blog series dedicated to the frequently asked questions we get during the Ask Me Anything About Social Enterprise (AMAASE) sessions (to learn more about AMAASE see below).
One frequently asked question is “what legal structure should my social enterprise be?”
Please note: this Blog does not provide legal advice, you should seek a lawyer’s opinion on legal matters such as “what legal structure your social enterprise should take?” This blog will focus on some things you may want to consider as you prepare to meet a lawyer. 
Also note: while we have listed some resources as a public service to our readers, this does not mean we endorse them. As always, use your own judgment as to what will work best for you and do not use these materials as a substitute for legal advice, use them to help prepare you to get legal advice.          

The first step is to realize what this question is – and what it isn’t – about. There is a distinction between: a) what you want to accomplish/how you plan on blending the social and the entrepreneurial, and b) the legal structure you use for that blend. It’s kind of like the difference between where you want to go on a trip (think of that as what you want to accomplish/how you plan on blending the social and entrepreneurial) and the mode of transportation you choose (think of that as your legal structure). Picking a car as your mode of transport when you want to go overseas is going to make life hard for you. That’s why they say form (legal structure) should always follow function (what you want to do).

Click here for a blog that explains what social enterprise is and some of the choices you can make.  Being aware of the choices you can make is a good first step in figuring out what you want to do.

But let’s get back to the issue of legal structure, the issue of the legal form your social enterprise should take.    

Johanna Mair (in “Social Entrepreneurship: Research as Disciplined Exploration“, hereafter referred to as “Mair”) makes the point that there are institutional aspects (what legal structures are available and the legal implications of each of those structures in terms of personal liability, risk, and taxation) and pragmatic aspects (such as beneficiaries’ ability to pay for services and the ability of an organization to access funds that may be legally restricted to a specific legal structure – for example, many Foundations can only provide grants to Charitable organizations) ) to consider when you are thinking about the legal structure that would work for you. Mair points out other pragmatic aspects include “how outside parties perceive the organization, the funding sources it can tap, and the stakeholder groups with which it can and must engage…”.

She gives two examples of social enterprises considering the pragmatic aspects of legal structure:

“As a founder of a social enterprise in Germany explained: We did this [combining legal forms] so that people take us seriously. We do not really need this legal form for our work. But people think only a nonprofit is appropriate for this. If we say we are a for-profit, they think we want to make money out of it.”
“Auticon, a social enterprise in Germany offering IT service delivered by people with autism, operates as a business (GmbH) but set up a nonprofit sister organization (gGmbH) to offer training services for people on the broader autism spectrum. Auticon uses the for-profit form to signal competitiveness in its service delivery, and it uses the nonprofit form in order to remain a respected player among organizations that serve people with autism.”         

We are going to refer to the Center for Social Innovation at the Stanford Graduate School of Business. Please note:  their information is U.S. based which does not always apply to the Canadian or Alberta context. Use the materials with caution and, as always, it is not legal advice, it is designed to help you prepare to get legal advice.

The Center for Social Innovation at the Stanford Graduate School of Business has a module on social enterprise legal structure which suggests you consider these issues to help you determine the right legal structure for you:

  • Mission: What is the nature of your mission and what is your commitment to protecting it?
  • Earned Revenue: What is your ability to generate earned revenue through fees collected for products or services, and can it produce income?
  • External Funding: What type of external funding will you need to develop your venture?
  • Incentives: How will you align incentives to motivate people to engage in your venture?
  • Scaling Impact: How might your design choices affect your strategy for scaling impact and serving as many people as possible?
  • Governance: Will your design facilitate board governance focused on maximizing impact?
  • Cost: How might your approach result in increased or lower costs, both financial and in terms of time and other costs?         

Most legal structure information goes straight to what the laws say is allowable (the institutional aspects). We really like that Stanford raises some of the pragmatic aspects and how they can impact your choice of legal form. You learn more about the issues above and Stanford’s module on social enterprise legal structure here.    

In the Canadian context, it is important to know that there is not a specific legal structure for social enterprises. In other words, it can be any legal structure – for-profit, non-for-profit, charitable, cooperative, B-Corp etc., although some of those legal structures will place some constraints on what you can or can’t do.    
Possible Resources:

1. For the Alberta Context: Integral Org Resources has some information on legal structure of social enterprises:

• Social Enterprise Legal Structures Toolkit

• INTRO to Social Enterprise: Which legal structure should we choose?

• Start Your Social Enterprise the Right Way: A panel discussion about social enterprise and the legal and regulatory environment

All at: https://integralorg.ca/attend-an-event/social-enterprise-events/

2. Canadian Revenue Agency- What is a Related Business and decision tree (relates to Charities)

https://www.canada.ca/en/revenue-agency/services/charities-giving/charities/policies-guidance/policy-statement-019-what-a-related-business.html

3. Chartered Professional Accountants Canada- 20 Questions Directors of Not-for-Profits Should Ask About Social Enterprise (quite old at this point, but has some good things to consider)

https://www.cpacanada.ca/en/business-and-accounting-resources/strategy-risk-and-governance/not-for-profit-governance/publications/social-enterprise-questions-for-nfp-directors

More About AMAASE:

AMAASE is an interactive session whose sole purpose is to answer social entrepreneurship questions from the audience. To that end, we have assembled a team of experienced professionals who will be available to answer any question you may have (or help you find the resource you are looking for).

The second Wednesday of every month has become a virtual watering-hole dedicated to social entrepreneurs where they can come and have their questions addressed by a regular panel that includes Innovate Calgary, the Social Enterprise Fund, Momentum, and the Trico Charitable Foundation. Register here: https://haskayne.ucalgary.ca/tricofoundation/community-engagement/ask-me-anything-about-social-enterprise  

Panel Details

Panel Moderators (Alternating):

Regular Panel:

Alternate Panel:

Missed a session or would like to see how the session flows? Catch up on all past conversations and shared resources on our YouTube playlist here.

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