Historically, businesses have had to declare themselves either nonprofit or for-profit. But some businesses are blurring the lines of these long-established categories by having two main objectives: doing public good and making money.
The number of business owners desiring to operate their companies for more than just profit-making, also called social enterprise or social entrepreneurship, is growing.
The recent joint announcement by Berkshire Hathaway, Amazon and JPMorgan to form a company “free from profit-making incentives and constraints” to address employee health care costs is evidence of this trend. Similarly, Larry Fink, founder of the large investment firm BlackRock, recently stated in a letter to CEOs, “Society is demanding that companies, both public and private, serve a social purpose. … A company’s ability to manage environmental, social, and governance matters demonstrates the leadership and good governance that is so essential to sustainable growth, which is why we are increasingly integrating these issues into our investment process.”
Successful, socially conscious companies like Warby Parker, Indiegogo, Toms, UncommonGoods and Lush also are inspiring more and more entreprenuers to pursue public benefit and revenue side-by-side.
The increasing interest and growth in this sector generates critical questions about how to structure and finance these organizations. As a result, legal considerations and the need for experts in this field are increasing as well.
With his Law of Social Entrepreneurship course, associate professor Cass Brewer is priming Georgia State Law students to help lead the way.
“We are preparing today’s students to be lawyers for these clients in the future,” Brewer said.
Why some companies need a blend
There’s an ongoing debate about what qualifies as a social enterprise. Some companies donate a part of their profits to a specific charity or spend more to use environmentally safe materials in their products. Some hire people who are disadvantaged, such as those living in extreme poverty or who have escaped human trafficking. Others lower the prices of products, such as medication, in lieu of paying their shareholders more money.
While there are no universal requirements for qualifying as a social enterprise, there’s a popular understanding that these companies sacrifice profits to accomplish a broader mission. It’s a way of operating a business that goes against the general rules of for-profit entities, which must make every decision for their shareholders’ benefit.
This type of public-benefit corporation would be especially advantageous to the public in health care, said Brewer and Yaniv Heled, associate professor of law.
“Traditional for-profit corporations are actually ill-suited for health care markets to achieve societal objectives,” Heled said. “If we want to better align social interests in the area of health care with the behavior of entities that provide health care, then we need to require all entities involved in providing health care services to be benefit corporations so they can consider not only their bottom lines, but also the effect certain decisions would have on the health of individuals.”
While nonprofits may seem ideal for socially conscious entrepreneurs, they also have disadvantages. The nonprofit structure prevents them from having any true ownership or legacy in their organizations, and it also can significantly limit the ability to innovate and grow like for-profit companies do.
“We’re so used to this binary world in which you’re either nonprofit or you’re for-profit, but people don’t live their lives that way,” Brewer said. “We aren’t entirely greedy and we aren’t entirely altruistic. The law hasn’t allowed business owners to engage in that balancing act. Until now, there has been no dimmer switch.”
Brewer said previous generations tended to focus on making wealth and then giving back once they were older. But the younger generation isn’t wedded to that idea and often will pass up a higher-paying job for one with more meaningful work. He said part of the reason is that we live in a time when most people’s basic needs are met. “Due to the tech industry, stock options and the overall increase in wealth in the United States, many individuals have made their fortunes very early in their lives, so they don’t want to wait until retirement to give back.”
Another factor has to do with coming of age during the 2008 financial crisis. “The constant pursuit of higher and higher returns is what ultimately led to the crisis, so the mindset of the younger generation is that profitability shouldn’t be the only indicator of success,” he said.
For social enterprises, the good the company does matters just as much as the money it makes.
Preparing students for social enterprise law
Brewer’s Law of Social Entrepreneurship course teaches Georgia State Law students about the challenges and opportunities this emerging area brings. Now in its fourth year, the elective includes an applied learning component—a project in which students “create” social enterprises. They draft articles of incorporation and write a paper addressing technical legal issues, including shareholder voting rights for major transactions and the extent of indemnification of directors from personal liability.
Tatiana Posada (J.D. ’18) said she learned how different and complex creating a social enterprise can be. “With corporations and LLCs, there are plenty of existing legal templates that you can play with and manipulate, but with social enterprises, none of that exists. Everything from management liability to the operating agreement is new.”
Brewer pointed out that where students set up their businesses is important. Many states don’t have any laws governing social enterprises, but the number that do is growing rapidly. In 2014, only 12 states had laws. By the end of 2017, there were 36.
“The differences in these laws may seem minor, but they’re extremely important to a business lawyer,” Brewer said.
The class project drives this point home. “You’re putting together your own entity,” Posada said. “It’s exciting, but also scary because you want to make sure that what you’re doing will hold up in court.”
Justin Leef (J.D./M.P.A. ’17), an associate at PwC Public Sector, echoed this. “Social entrepreneurs may look at three different business forms, and even after deciding, they may choose the wrong one and get themselves in trouble. That’s why they’re flocking to states where these things are clearer. They want to incorporate in states that have statutory language on the books.”
Allowing for a different mindset
“Many social enterprises may only break even, but that’s OK,” Brewer said. “If that’s how they want to run their companies, they should be able to do that.”
It’s a revolutionary business model that attracts an entirely different type of shareholder —which also brings new risks.
“If social enterprises don’t benefit others enough in the eyes of their investors, they can be sued for not doing enough good. That’s unprecedented,” Brewer said.
Regardless of whether a student or graduate wants to pursue social enterprise law, it’s important to have a general understanding of this emerging field, Posada said.
“Companies need to have the choice of using a different approach,” she said. “The Georgia General Assembly is hesitant to create these laws in our state, but we need to help them understand that the market’s there and that businesses want this option.”
Leef agreed, adding that many people are willing to pay 15 to 20 percent more for products that aren’t mass-produced. He sees Georgia State playing a critical role in shaping the future of social enterprise law, as it’s one of few law schools teaching it. In addition, the university introduced a bachelor of interdisciplinary studies (B.I.S.) in social entrepreneurship last year.
“In the future, I see the College of Law becoming a hub for social enterprise,” Leef said.
Brewer concurred. “We’re nimble and flexible enough to take on brand new topics like this,” he explained. “We’re doing some cool things here at Georgia State, and this is one of them.”