Business Models for Social Innovation
The social business model provides the perfect vehicle to maximize social and environmental impact, while achieving fiscal sustainability in the new global knowledge-based economy. Indra K. Nooyi, CEO of PepsiCo. recently stated, "I am convinced that helping address societal problems is a responsibility of every business, big and small...Financial achievement must go hand-in-hand with social and environmental performance." The recent emphasis on social impact has spawned a myriad of social entrepreneurs ready to take on the world.
As the President and Founder of a social business, I'll be the first to admit my bias. Yet, many entrepreneurs seeking to create new businesses, lack significant knowledge regarding the variances between social and traditional business models necessary to make an informed decision. Up until more recently, entrepreneurs have had to choose between social impact and profit. I am glad to inform you that the sustainable and successful business models of the future will bear no such clear distinction.
There are a number of traditional legal structures, and because you're unlikely reading this article for the traditional, I will only briefly touch upon those which are the most common. The sole proprietorship is the oldest and most common business model type. In order to qualify as a sole proprietorship, one must merely own and manage a business with an intent to earn a profit. Most importantly, the owner of this business type is responsible for all debt, loans, and losses. This model also carries no tax incentive for investors. The next model is the partnership. A partnership is a for-profit entity of at least two individuals, who also share in the profit, losses, and management of a business. Additionally, this business type does not include tax incentives for investors.
The choice model for many large organizations is the corporation business model. A corporation is an association of individuals with powers and liabilities outside from those of its members. In other words, the liabilities of the company are separate from those of its owners and shareholders. The benefit of the corporate model is the ability to issue stock, which is highly efficient for raising large amounts of capital, and therefore fueling future growth. However, the drawback of such a model is the significant amount of paperwork required to incorporate such a business model, as well as the double taxation of corporate earnings and dividends distributed to investors. The more recent and popular business model, has been the LLC or limited liability company. The owners of a limited liability company enjoy limited liability from the debts of and losses of the company. This model too does not carry any tax incentives for investors.
The heavily utilized not-for-profit business model, which has had a monopoly over the philanthropic sector for decades, is the 501 (c)(3) business type. This business model provides a tax incentive to donors for contributing to an organization whose primary objective is to achieve a social benefit. However, although there is a tax incentive for donors, the growth of the organization will always be limited because of the inability of the 501(c)(3) to be organized or operated for the profitable benefit of private interests. This model can also be a deathtrap for innovation, requiring its operators to spend more time fund-raising and writing grants, than actually focusing on maximizing the organizations impact within its designated sector.
To a generation of millennials who witnessed corporate greed bring the world to it's knees during the 2008 financial crisis, profit as a sole motive has become increasingly unpalatable. Rather, the perspective more readily adopted is that businesses that do good, are good businesses. According to ChicagoBusiness.com, for millennials, who are 86 million strong in America and make up the largest population group the U.S. has ever seen, social responsibility is the new religion. According to PriceWaterHouseCooper, sustainability will represent an $11 trillion dollar sector by 2050. As a result of this dynamic shift to more sustainable and benevolent business practices, innovative business models have been created around the country and the world, to benefit not only the bottom line, but to benefit people and the environment as well.
There are three business models and one certification which will recognize an organization as having a social mission beyond profit. The first and more conservative model is the Social Benefit Corporation (SBC). In April of 2013, our organization initiated and successfully passed LB751, bringing SBCs to Nebraska. SBCs, have no tax incentive, rather they are more of a company statement of its commitment to social and environmental sustainability. The main aspect of a SBC, is that it must make an annual benefit report available to the public, either by way of a company website or some states require that the report be submitted directly to the Secretary of State. This model is a state sanctioned model, and is not associated with B-labs, which provides a certification we will touch upon later. The SBC model is currently available in 26 states, including the District of Columbia.
The next business model, and the business type that our organization has chosen to incorporate under, is the L3C or low-profit limited liability company (remember the 3 L's). The L3C business structure was first established by legislation in 2003 in Vermont, with a total of over 1,000 companies utilizing this business type in 8 different states. One benefit of the model, is the relative ease of the incorporation or application process. Due to the unavailability of the L3C model in our home state of Nebraska, we were forced to incorporate in Michigan, and to our surprise the application was one page. One page! This model is a prime business type to benefit low and middle class citizens who may lack the legal savvy or the upfront costs associated with obtaining legal representation to incorporate. More importantly, the L3C has a unique tax incentive, which allows for philanthropic organizations to invest in L3Cs through the receipt of a PRI, or Program Related Investment letter issued by the IRS. The low-profit model also is distinct from the 501 (c)(3) model, due to the fact that there are no limits on how much money can be made, or distributed back to investors.
As a result of increased popularity in the past decade, the cooperative businesses model has recently received a lot of attention. Although not new at all, the ancient method of collaboratively conducting business, has enjoyed levels of higher relevance in the current equity starved market. The cooperative is a jointly owned enterprise engaging in the production or distribution of goods or the supplying of services, operated by its members for their mutual benefit, typically organized by consumers or farmers. Cooperatives are able to issue voting and non-voting shares, as well as distribute limited profits annually, while maintaining a tax benefit on earnings, as long as a high percentage of its members purchase products and/or services from the cooperative itself.
The last model, which really isn't a business model as much as a certification, is the B-corp. The B-corp is not a state sanctioned business type, and organizations seeking such certification must pass rigorous accountability and transparency standards, set out by a non-profit company called B-lab, who issues the certification. Roughly 900 companies have been certified by B-lab, and another 16,000 companies utilize the certification framework to measure social and environmental impact, including ours. The principal benefit of receiving this certification is the fact that it is heavily recognized by impact investors and serves as a milestone for any organization seeking to maximize environmental sustainability and social impact.
In order to thrive in the unpredictable knowledge-based economy of today, new and innovative business models, with the flexibility to address social ills, the rigor of a for-profit culture, and access to traditional non-profit funding streams such as foundational assets, makes the social business model a prime business type for the future. Traditional business models, such as the Corporation, LLC, and even the 501(c)(3), lack the flexibility to adapt to our ever-changing and complex world. As a result, the time has come for the playing field to level out, by placing people and the planet on par with profit. In a perfect world we'd have Superman to call on in our global time of need, but in reality our last hope may be the social entrepreneur.
Ean Garrett, J.D., is the author of two books, "Rebirth of a Dream" and "The Immovable Race", as well as the Chief Innovation Officer of the consulting firm, Infinite 8 Institute, L3C, specializing in education and social innovation. Follow him on Twitter & IG: @eangarrett