What is the best legal structure for a social enterprise?
There is no one definition of social enterprise. In general, a social enterprise is a profit-making activity that has a social purpose. A social enterprise can be legally structured in many different ways. It can be run by a charity, a non-profit, a for-profit or a hybrid corporation called a community contribution corporation.
A charity and a non-profit are different under the Income Tax Act (Canada). A charity must be registered with Canada Revenue Agency (CRA) and carry on charitable activities. A non-profit is not a charity and has to be operated for a purpose other than profit.
A charity, other than a private foundation, can carry on the social enterprise itself, if the activity qualifies as a related business. The benefit to carrying on the social enterprise for the charity is that a charity is not-taxable, and therefore profits from the social enterprise are not taxable. This allows all the profits to be used for the charitable purpose of the charity. However, the social enterprise activity must meet the definition of related business. [If the social enterprise is activity of the charity, then the charity is also liable for the social enterprise.]
CRA takes the position that a non-profit can only make incidental profit. Therefore, this is not a good structure to use to raise funds that will be sent to another entity, such as a charity. However, a non-profit can be a good structure for a social enterprise where the activity itself carries out the social purpose. For example, a restaurant that teaches people without a job how to cook may be structured as a non-profit, because the goal is not to make money to send to another project. Instead, the goal is to teach people a skill and help them gain employment.
A for-profit corporation is also used to carry out social enterprise activities. The benefits of running the social enterprise in a for-profit corporation is that a corporation can carry out any legal business activity, and the liability from the social enterprise is separate from the charity. While a for-profit is taxable, it can reduce its income by 75% by making gifts to a Canadian registered charity.
A new alternative in Canada is using a hybrid corporation called a community contribution corporation (CCC) or a community interest corporation (CIC). These new corporate structures are available in British Columbia and there is legislation pending in Nova Scotia. For tax purposes these new corporations are treated the same as are for-profit corporations – they are taxable.
However, under corporate law, they are required to have a social purpose, and there are restrictions on the use of assets to ensure the funds are used for the social purpose. A regular for-profit can use its funds in the same way, the only difference is that the CCC legislation requires the CCC to use the funds for the social purpose. Thus, this type of corporation can give the public some certainly that the funds will be used for a social purpose.
This has been a brief overview of the legal structures that can be used to carry out a social enterprise. The best choice will differ depending on the goals of the social enterprise and nature of the activity.
Kate Lazier is a partner in the Charity and Non-Profit group at Miller Thomson LLP, firstname.lastname@example.org, 416.595.8197, @charitylawcan