Balancing Purpose and Profit

Is there some correlation between an entrepreneur’s purpose in starting a business, whether it is one created to have positive social and financial returns or simply to maximize profit, and access to mainstream investors? The answer to this question used to matter more than it does today particularly in the following G8 countries (Canada, France, Italy, UK and US) and will hopefully matter even less as legal forms of “profit with purpose businesses” gain traction and enable purpose minded entrepreneurs to access investment capital from mainstream investors.  The authors of the 2014 report titled Balancing Purpose and Profit highlighted the positive trends taking place in mainstreaming legal forms for profit-with-purpose business.  In their 2016 update to the 2014 report, they write the following:

“The development of legal and other structures that make profit-with-purpose businesses (“PPBs”) more attractive is a powerful confirmation of the reality in our civil society that not every investor or shareholder subscriber is motivated solely by profit. Millions of business owners around the world seek to do more than simply maximize financial return … primary purposes include improving the environment, eradicating poverty and developing communities. In the classic model, these social purposes had to be pursued as a charity or nonprofit corporation. This is no longer the case, and the G8 countries are continuing to develop legal regimes that allow businesses to have a primary mission of having a positive social and environmental impact while gaining access to investment capital that can deliver that impact in unprecedented scale and scope.”

Mainstream investors will mostly invest in businesses with well-developed and widely used legal structures/forms.  They want investments to be in legally registered entities with known governance parameters. Over the last few years there has been a flurry of legal activity around company formation targeted at locking-in mission for profit-with-purpose businesses.  This note highlights progress in the G8 countries from a report published first published in 2014 and then updated in 2016 by Orrick Herrington and Sutcliffe LLP, UnLtd, and Thomson Reuters Foundation

It is exciting to be a profit and purpose minded entrepreneur in any of Canada, France, Italy, UK and US, where PPB legal forms have been enacted and adopted relatively well.

A Canadian entrepreneur can register a PPB in British Columbia and have operations across the country under the Community Contribution Company (“C3”) Act of 2012.  In 2015, British Columbia strengthened market opportunities and the role of C3s in the economy by introducing Social Impact Purchasing Guidelines providing for the inclusion of social values in solicitation (request for proposal) documents for goods and services.

In France the government has shown support for social entrepreneurs and investors. PPBs are regulated under the Social and Solidarity Economy (“SSE”) Law.  A “Solidarity enterprise of social utility” designation allows PPBs access to government funding as well as procurement set asides. Investors in these businesses enjoy tax incentives 18% tax credit on income and 50% tax break on losses. The B-corp label was officially launched in 2015, allowing businesses to add purpose to their mission, committing to a set of impact best practices.

Italy is making progress. In 2015, the government enacted regulations governing “innovative start-up with a social purpose” which are granted tax incentives including an individual tax credit of 25% of the amount invested and a corporate tax credit of 27% of the amount invested. In 2016, the Italian government introduced the Benefit Corporation framework. In addition to benefits under the tax code failure to pursue impact goals as committed to can result in sanctions again the B-Corp entity.

In the UK the authorities have, via the Social Investment Tax Relief Act, provided for a 30% tax relief for investments in qualifying social enterprises and additional tax exemptions on capital gains from qualifying social investments.

If you are a mission-driven entrepreneur incorporating your business in the US, you can take advantage of registering as a Benefit Corporation or Low Profit Limited Liability Company. These models have become prevalent with the Benefit Corp structure as the most popular. State legislatures have enacted regulations favorable to entrepreneurs wanting to convert for profit businesses to PPBs. The market has also shown progress through IPOs demonstrating that PPBs can offer investors favorable returns.

The important question is how can the adoption of these legal forms be fast-tracked in countries that need the growth of social entrepreneurship to deliver benefits that cannot be fulfilled by government investment in areas that include protecting the environment, eradicating poverty and generally developing stronger communities?

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