Funding options deep dive social venture

Funding Options for Social Ventures and Nonprofits

Sharon C. Lincoln, Foley Hoag LLP Larry Nannis Katz, Nannis & Soloman CPA

Ini$al Thoughts

“I’m encouraging young people to become social business entrepreneurs and contribute to the world, rather than just making money. Making money is no fun. Contribu$ng to and changing the world is a lot more fun.”

-‐Muhammad Yunus, co-‐founding board member, Grameen America

General Overview: For-‐profit vs. Nonprofit

For-Profit Nonprofit / Tax-Exempt

Mission   Profit motive   Social benefit (L3C, benefit corporation, etc.)   Private enrichment

  Religious, charitable, scientific, testing for public safety, literary, or educational purposes

  Public good must be promoted from earnings, activities

Funding   Equity investments   Loans   Grants (in select cases)   Earned income

  Donations and grants (charitable deduction for donations to 501(c)(3) organizations)

  Loans   Earned income

Ownership   Individuals and entities   None   Note: AG and IRS

Taxes   Pay income tax and capital gains tax

  Exempt from income tax and capital gains tax (but still must file an information return)

  Note: UBIT, employment tax, etc.

In detail: The For-‐Profit World

•  Sole Proprietorship •  LLC/L3C

–  Single-‐Member –  Mul$-‐Member

•  Partnership –  General Partnership –  Limited Partnership –  Limited Liability Partnership

•  Corpora$on –  S Corpora$on –  C Corpora$on –  Benefit Corpora>on –  Flexible Purpose Corpora>on (California)

Sole Proprietorship

•  Single Owner •  No En$ty-‐Level Tax •  No Liability Protec$on •  No Filing Requirements

–  Except: •  “Doing Business As” •  Employees •  Taxable Sales

•  No Formali$es •  No/Low Fees

Limited Liability Company (LLC)

•  One or More Owners •  No En$ty-‐Level Tax •  Limited Liability •  Annual Tax and En$ty Filing Requirements •  Flexible Formali$es •  Higher Fees •  Social mission may be highlighted or emphasized in LLC agreement

Low-‐Profit Limited Liability Companies (L3C)

•  One or More Owners •  No En$ty-‐Level Tax •  Limited Liability •  Annual Tax and En$ty Filing Requirements •  Flexible Formali$es •  Higher Fees •  Charitable or educa>onal mission must be primary, profit-‐making secondary

•  L3C legisla$on in Illinois, Louisiana, Maine, Michigan, North Carolina, Rhode Island, Utah, Vermont, and Wyoming

Partnerships

•  Two or More Owners •  No En$ty-‐Level Tax •  Limited Liability* •  Except General Partners •  Annual Tax and En$ty Filing Requirements •  Minimal Formali$es •  Moderate/Higher Fees •  Social mission may be highlighted, emphasized in partnership agreement

Corpora$ons

•  One or More Owners •  Tax Treatment Depends on “S” or “C” Status •  Limited Liability •  Annual Tax and En$ty Filing Requirements •  Rigid Formali$es •  Moderate Fees •  Tradi>onal corpora>ons have one primary fiduciary duty:

Enrich shareholders •  Flexible purpose corpora>ons may have mul>ple fiduciary

du>es such as social and environmental priori>es, in addi>on to shareholder enrichment; benefit corpora>ons must have a general or specific social duty

Benefit Corpora$ons

•  Massachuse\s just enacted legisla$on permi]ng benefit corpora$ons to be organized in the Commonwealth •  Mass. General Laws Chapter 156E

•  Must pursue social welfare objec$ves; included in ar$cles of incorpora$on

•  Permit corporate directors to take into considera$on and pursue general or specific social welfare goals, in addi$on to maximizing profit –  No director liability for not maximizing shareholder return on account

of pursuing these objec$ves

•  More transparency requirements –  Annual benefit report –  Oversight and repor$ng by designated benefit director (and possibly

also, benefit officer)

S Corpora$ons

Eligibility – Domes$c Corpora$on

–  ≤ 100 Shareholders •  All shareholders must be individuals •  No shareholder may be a non-‐resident alien

– One Class of Stock

–  In Massachuse\s, Ch. 156E appears to permit benefit corpora$ons to be S Corpora$ons

Nonprofit/Tax-‐Exempt Organiza$ons

•  Nonprofit is a state designa$on •  Tax-‐exempt status is a federal designa$on, regulated by the IRS – Nonprofit en$$es organized at the state level apply to the IRS to be recognized as tax-‐exempt

•  Chari$es, schools, hospitals are generally 501(c)(3) en$$es – Social welfare organiza$ons 501(c)(4) – Business leagues 501(c)(6)

Summary of Funding Op$ons for For-‐Profit En$$es

•  Investors –  Stock (founder, restricted, reverse ves$ng, op$ons) –  Conver$ble debt –  Partnership interest – Membership interest (LLC, L3C)

•  Lenders •  Grants (less common for tradi$onal for-‐profits)

–  Government grants, etc. may qualify as nonshareholder contribu$on to capital

•  Revenue from opera$ons, investments •  Tax breaks (state, local exemp$ons, tax credits, etc.)

Summary of Funding Op$ons for Tax-‐Exempt En$$es

•  Contribu$ons, gifs, membership dues –  501(c)(3) en$$es may receive tax-‐deduc$ble contribu$ons –  Public chari$es must meet certain thresholds of public support in order to avoid classifica$on as private founda$ons

•  Grants •  Revenue from tax-‐exempt opera$ons, investments

–  revenue from ac$vi$es unrelated to tax-‐exempt opera$ons is taxable…too much of this type of unrelated revenue can jeopardize tax-‐exempt status)

•  Tax subsidy (not liable for income tax)

We’re here to help

Sharon C. Lincoln Foley Hoag LLP

617-‐832-‐1287 [email protected]

Larry Nannis Katz, Nannis & Solomon, PC

781-‐453-‐8700 [email protected]

Funding options deep dive social venture

Economy & Finance

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