Beginning with the End in Mind: Legal Entity Selection for Social Ventures

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It can be daunting to decide whether to organize a new venture as a nonprofit, tax-exempt organization or as a for-profit, business entity. Sometime an organization could be organized and operated both in a manner that qualifies for tax-exemption under Internal Revenue Code Section 501 or as a taxable business entity.  Toss in a number of recently developed “hybrid” legal entities like the L3C and the social benefit corporation, and it is easy to quickly become misguided and/or confused in the options.  Founders should thus heed Stephen Covey’s wisdom and begin with the end in mind. 

While a number of legal and tax considerations should be carefully evaluated to address these organizational decisions, the right initial approach is to carefully consider the founders’ long-term vision and goals of the organization. Where do the founders see the organization in ten years and how will it be funded on an annual basis? What are the founders’ long-term personal needs from the organization? Are the founders looking to rely on the venture as their career? What plans do they have to transition out of the venture?  (“Transition out, we haven’t even started!”)  By driving at the core of the founders’ long-term goals and desires, the best legal solutions can be identified.

Founders should also take heart that many times the solution is not either a nonprofit or a for-profit, but rather a carefully structured combination of legal entities.   Several years ago, Attorneys Ingrid Mittermaier and Joey Neugart of the San Franciso-based law firm, Adler and Colvin, wrote a very easy to read article on the use of for-profit and nonprofit multi-entity structures, entitled, Operating in Two Worlds: Tandem Structures in Social Enterprise (Practical Tax Lawyer, Fall 2011).  A copy of the article is still available on Adler and Colvin’s website.