Does form follow function in social enterprise?
If you’re someone thinking about building a social enterprise, you’ll undoubtedly have to think about the form of the organization that you want to put together. Form follows function, to a certain degree, and form is really important when you’re thinking about what your social enterprise business will do.
In British Columbia, you have three (and a half) corporate forms that you can use to build a social enterprise. A corporate form is simply the kind of organization you build – don’t worry too much about the term ‘corporate,’ even though you might immediately think of corporations… a corporation is only one of the corporate form.
You’ll likely be quite familiar with two of the corporate forms, because they’re the kind you interact with all the time. The other one and a half forms may sound a little more unfamiliar, but they’re ones you should consider as well.
So, if you’re starting a social enterprise in BC, you can choose between a company (corporation), or a society (nonprofit), or a cooperative. The final half option is a community contribution company. I’ll explain a little bit about each of these below, but one thing I want you to really think about: form follows function.
I hear from a good number of people on a regular basis who have heard about one of these forms and who are really excited about them – and then want to build a business around the corporate form. This isn’t always the best idea. You should have your business idea, sometimes with your colleagues and collaborators, and then you should explore the form that fits it best. Going about this the other way around can cause some challenges.
This is important because each corporate form has a different kind of purpose. When you’re setting up your social enterprise, you’ll want to think about which one suits your purpose best. Read on to find out more.
You’re probably the most familiar with the company/corporation corporate form, if only because pretty much every business you might encounter is generally one of these. Everything from a mom-and-pop store to a transnational corporation is, essentially, a company/corporation.
In BC, companies and corporations are incorporated under the Business Corporations Act. The act sets out the basic framework that makes up a company, and its basic structure, including shareholders, directors, and officers.
What the act doesn’t set out is the purpose of a corporation. Essentially, a company is a group of people who have invested money in a business idea and have incorporated it so that it can carry out that business and generate more money for them. Again, no matter the size of the business company, whether it’s a small mom-and-pop store or a massive transnational corporation, the purpose of a business company is generate profit back to shareholders through dividends or other means of transferring profits and assets to owners.
Because it’s profit oriented, you can’t create a business company that has a charitable registration or is considered nonprofit. A business company is a good form if you want to build a profit-oriented organization that you have sole or closely-held control over, though, because you can build an organization that you own. Also, because voting in the corporation is based on the number of shares that someone owns, and because shares are sold to shareholders, how much money a shareholder invests in a company is related to how much control they have over the corporation.
You’re probably also really used to nonprofit societies. They’re everywhere! In BC, there are tens of thousands of nonprofit societies. Everything from the Canadian Cancer Society to your local junior girls’ soccer team is likely incorporated as a nonprofit society.
In British Columbia, nonprofit societies are incorporated under the Society Act. Much like the Business Corporations Act for companies, the Society Act sets out the basic structure of a society: there are members, directors, and officers.
Again, the act doesn’t set out the basic purpose of a society, though it does differentiate it considerably from a company. Where companies are profit-oriented and focus on selling a business model and generating profit back to shareholders, societies are instead focused on doing something that creates a community benefit. That community benefit can be really wildly different depending on the society – sometimes, it’s a clan association in Chinatown, or it’s a soccer league, or it’s a charity that raises money for cancer research. Sometimes it’s even a business association!
The nonprofit status of a charity changes up how it is owned. Essentially, no one owns a society. Because societies are understood to have a community good and social purpose, the government is the essential “owner” of a society. If it generates a profit in a year (has an excess of revenues over expenses), then that revenue has to be reinvested in its operations. People may pay membership fees to the society, but they do not own it. They can’t get a share of profits or assets. And when a society shuts down, winds up, or dissolves, its assets must be donated to another nonprofit organization.
Depending on their goals and incorporated purpose, societies can be charitable – that is, they can register with the Canada Revenue Agency as charities, and then issue tax receipts in exchange for donations.1 This is something that companies cannot do.
The purposes of societies are generally something to do with uniting a community around a common cause. Whether it’s art, sport, or charitable giving, they try to bring people together and rally around a common cause.
Societies are also controlled differently.2 Because no one is really an ‘owner’ of a society, typically, each member has one vote in the governance of the society. This means that you can’t really start a society on your own and than have direct control over it – you need at least five people to incorporate a society – but also that the members each have equal say in what happens in the society.
Carrying on business as a society is also complex. Societies are generally considered to be exempt from income tax, but that’s not completely correct – if a society is carrying on business, it can be taxed on those business revenues. Because of this catch, carrying on business as a nonprofit society may not have any benefit over incorporating as a business company, aside from the official status as a nonprofit.
Cooperatives are a different kind of organization altogether. Instead of being purely profit oriented, or only about bringing communities together, cooperatives are organizations made up of a community with a common purpose and a collaborative method of carrying out that purpose. Essentially, co-ops bring people together to work together to solve common problems and carry out common goals.
Cooperatives in BC are incorporated under the Cooperative Associations Act. Much like the Society Act and the Business Companies Act, the act sets out the basic structure of what a cooperative is: member owners, directors, and officers.
And much like societies and companies, the act doesn’t set out what the purposes of a cooperative must be, though it does contain some interesting links towards the general principles behind co-ops. These general principles are actually international principles of cooperation – principles that cooperatives all across the world agree to and endorse in some way or another. These principles include a dedication to equal democracy for all members, open and inclusive membership, education and training, cooperation between cooperatives, and concern for community. All in all, there are seven principles of cooperation.
Because co-ops are created differently, they’re also owned differently. Unlike a society where no one owns a society, there are shareholders in co-ops. In fact, each member of a co-op must also be a shareholder. But unlike a company, no matter how many shares an individual member holds in the co-op, each member only has one vote. This makes co-ops inherently democratic – something that can’t happen in a company.3
Co-ops can be for-profit or nonprofit. In a for-profit co-op, you receive a share in the profits that a co-op might make in a year. This means that if your co-op is profitable, you’ll receive a share of those profits. Nonprofit co-ops can’t share profits – like societies, they have to reinvest in their own operations with any profits. For profit co-ops can split assets amongst members when they dissolve, but nonprofit co-ops need to donate these to other co-ops or charitable organizations.
I’d argue that co-ops are the original form of social enterprise: their history dates back to the industrial revolution where people in a company town in the United Kingdom built a co-op store to give them some freedom and ability to support themselves.
A co-op’s purpose is about empowerment and solving common problems by bringing people together to work together. This is a purpose that often matches social enterprise.
So, you’re probably wondering where the “half” a corporate form comes from in this review. Well, here we are – the community contribution company.
Recently in BC, our government has created a new corporate form – the community contribution company. These are a new corporate form, but they’re not really an entirely new and separate form. Instead, they’re a kind of business company.
There isn’t a specific piece of legislation that community contribution companies are incorporated under – officially, they’re incorporated under the Business Corporations Act. However, the parts of that legislation specify a few important things about community contribution companies:
First, they need to have a “community purpose.” This isn’t specifically defined, but it does mean that the purpose of a community contribution company needs to benefit something more than just the stockholders of the company. This is similar in concept to a society, but a community contribution company can still create profit for private shareholders.
Secondly, a community contribution company has restrictions on the profits and assets it can give to its shareholders. In total, only 40% of its annual profits and 40% of its assets can be distributed to shareholders. The rest needs to be either invested in or given to organizations that support its community purpose.
Also, community contribution companies need to report publicly on their community activity and have a larger board of directors to ensure public accountability. That being said, the control of a community contribution company is similar to that of a regular company – votes are assigned by shares, and people who own more shares have more votes.
Essentially, a community contribution company is a for-profit company that gives some of its profits to a community purpose. They have no special tax treatment, and they aren’t particularly purpose-driven, but they do need to have a blended purpose.
What about B-Corps and other designations?
That’s a great question. There’s an organization out there that brings together companies, co-ops, and societies with social enterprise purposes, and certifies them as “B-Corporations.” B Corporation is a term that is a legal form in some parts of the United States, and it resembles our community contribution company.
However, B-Corp has no legal weight as it’s a marketing label and not a corporate form.4
How do I choose which corporate form is best for me?
When choosing a corporate form for your social enterprise, you need to think of the purpose of the organization first. Who would be the clients and the owners? How much control should they have? Is it supposed to be democratic? What happens with profits?
Some of the answers to these questions will lead you down one path or another, and hopefully to a corporate form that works for you.
However, if you get lost going down that path – get in touch with us and we can help. We offer social enterprise consultations, and we’ll book a free thirty minute one just for you to help you choose your corporate form.