How To Use An LLC In Social Impact

social, enterprise, LLC, impact, nonprofit, startup

Using an LLC to Make An Impact

Many of us left 2016 feeling the same way we felt finding out Santa isn’t real. It was tough.

The upside? There’s been a stirring in the social cause space. It’s inspiring people to effect change in impactful ways. Ways that push the boundaries of what was long held acceptable or status quo.  Using innovative structures and business models to tap into new approaches to the world’s problems. And one such approach is the use of the LLC for social impact.  I’ll  shine a brief light on what an LLC is, how to use it in the social cause space along with its potential hangups. And we’ll cap off with a few resources to keep the conversation going.

Who’d of Thunk It

The unprecedented popularity of the LLC has been of (pre-demise) Jonas Brother proportions. Statistics show a consist 80% percent increase in its use over the last few years. You can attribute most of that popularity to its flexibility. The irony is the same thing that makes the LLC wonderifous (my word) also makes it difficult to use.

There’s so much depth to the LLC, making it a comfortable fit formal sorts of agendas and applications. We’re already seeing its use in the social impact space increase. And I’m pretty certain we’re going to see its use more in the charitable space as well. Especially after all the hubbub with Zuckerberg forming his grant-making foundation as an LLC.

What Is An LLC?

LLC stands for “Limited Liability Company.” What gives it life is an Operating Agreement.  Things like management, funding, meetings, duties, expectations, etc. are set out. Basically making the Operating Agreement an instruction manual for the organization. 

Members make up the LLC, but founders can choose whether members, managers or managers and members run the day to day. The decision comes down to how much involvement members want to have.

ex. Where some members have a limited role of investing into a program, those investors may let managers run daily operations. And reserve their input to big decisions. Mangers could be a select group of members or come from outside the organization. There’s also creative things you can do with membership classes and tiers. This could come in handy where a charity or social enterprise wants to maintain control of the organization.

An upside to the LLC is that it does away with many corporate formalities while keeping solid liability protection. Which means LLC’s can enter into their own contracts, own land, sue, etc.

Its “pass through” taxation also makes the LLC a favorite to anyone looking for tax benefit. This is where money from the LLC isn’t taxed at the entity (LLC) level, but taxed at the member’s level. Which means that money isn’t taxed twice.  Also, there are major tax benefits to investors who want to fund with capital and assets that would be subject to a much higher tax in a corporation.

How can I use LLC’s for good?

The hallmark of a corporation is its hierarchal setup. And this top-down style of management may work in some instances. But some find the Hogwarts-esqe arrangement stifling for collaborative, networked projects. Making the LLC more attractive for horizontal, democratically focused missions.

What makes the LLC so empowering is that you can name stakeholders outside of members to which the venture owes moral or legal obligations.

For example, if the LLC’s mission is to sustainably manufacture boats in Texas gulfs, the organization could name gulf residents or Texas wildlife as stakeholders in its formation documents.

It’s this ability to get creative with legal obligations that might make it easier for certain for-profits to approach foundations for grant-funding, like Program-Related Investments (PRI’s). 

Ways I see LLC’s used in practice?

By nonprofits to segregate different ventures they’re undertaking from mainstay programming. In other words, as a way of managing risk and or taking risks in their mission. Especially the case where land or other exposures need a protective box.

A way of accomplishing non-charitable work with a social bent by making social/cause-related implications a primary concern in decision-making.

Though rare now, to form a nonprofit. It’s tricky, but an LLC can even get 501(c)(3) tax exemption. More on that later.

Note, there’s no such thing as a “nonprofit LLC” in Texas, but an LLC may be created for a “charitable purpose.”

Its blank slate makes the LLC adaptable for virtually anything lawful. Gold for anyone wanting to mold an organization with a social focus and mission.

What are the hangups?

My dad used to say the same thing that’ll make you laugh will make you cry. And that’s the case with LLC’s.

Again, its flexibility makes them an amazing candidate for unique and innovative ventures. But it also makes them daunting. There aren’t straightforward templates on implementation or use. So a lot of thought and precision goes into drafting in the formation documents.

Other things to keep in mind?

Nonprofit LLC’s are tricky, especially those hoping to get 501(c)(3) tax exemption. The rules around who can be members and who can’t are strict. For the most part, membership is limited to other charities and governmental or municipal authorities. A way to keep individuals from privately benefiting and for-profits from using nonprofit LLC’s as shelters. Specific language goes into the formation documents to assure use for charitable purposes.  There are also restrictions on the use of funds during operations, once operations cease and in asset transfers. All of this to say,  these restrictions (especially around membership) can be deal-breakers for ventures who want to involve lenders, for-profit corporations or other groups without a charitable status.

In very limited circumstances a nonprofit may enter into an LLC with a for-profit; without jeopardizing its exemption status. But (shocker) there are strict rules around ownership and control. There also strict requirements around formation documents and use of funds. So, again there isn’t much flexibility for those LLC’s who want to include charities. 

The Case For Social Impact Use of an LLC in Texas

If legal structures were a car lot, Texas has the Ford Fiesta’s sitting at the back of the lot — next to the broken air pump.

We’ve made few changes to the types of structures available to ventures over the years. Making it difficult for founders who want to use hybrid arrangements. To be creative in Texas founders can’t look to the structures themselves. Instead, founders have to mold what exists in original ways to accomplish their mission.

The LLC is a great way of doing this for a few reasons. One, LLC’s in Texas can be used for any lawful purpose. Making the sky the limit, so far as the LLC doesn’t violate the law (subject to a few caveats if you plan to get federal tax exemption.) Second, the shape an LLC takes depends entirely on the Operating Agreement its members puts in place. Offering opportunities to be imaginative with how they treat their social purpose. Third, the member/manager setup allows for cool interdisciplinary collaborations between charities, NGO’s, investors, for-profits and social enterprises.

Texas doesn’t have L3C’s as an option, and it doesn’t look like it will anytime soon. The same with the Benefit Corporation. There is a “Special Purpose Corporation” which allows founders to insert a mission into its formation docs (like manufacturing shoes sustainably) and make that purpose an overarching concern. So if it comes down to profit or sustainable practices, the board could choose sustainability and do so with worrying about a lawsuit. Personally, I find the Special Purpose Corporation to be a bit like those AS SEEN ON TV products. Sure, a dancing remote cubby seems like a good idea. But at the end of the day, it’s all just show.

Next steps

Like what you’ve read so far? Good! Talk to an attorney. And no offense to them, but not an attorney whose only experience in the social impact space is doing the Ice Bucket Challenge. Talk to someone with experience working on social impact projects and plan. Look at what you plan to do, how and with whom. Will there be potential governance issues? Tax implications? Logistical hurdles? These are the things you want to understand.

Resources


For more information check out:

  • Texas SOS Nonprofit FAQ’s: http://www.sos.state.tx.us/corp/nonprofitfaqs.shtml
  • Skoll Foundation: http://archive.skoll.org/2006/09/25/creating-a-hybrid-for-profit-non-profit-social-enterprise-structure/
  • Social Enterprise Law Tracker: http://socentlawtracker.org/#/map

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