Over the past few decades, many pioneering organizations across the three primary sectors – private, public, and social – have been blending social purposes with business approaches. There are many expressions of this trend, including corporate social responsibility, microfinance, venture philanthropy, sustainable businesses, social enterprise, privatization, community development and others. As this activity matures, it is becoming formalized as a “Fourth Sector” of the economy. This Fourth Sector is emerging in the U.S. and abroad, with over twenty different names to describe the activity within the Fourth Sector. It emulates a new generation of value-driven consumers and shareholders who are demanding that corporations benefit their communities. For more information, click here.
Fourth Sector Organizations are...
The defining characteristic of all Fourth Sector organizations is that they integrate social and environmental aims with business methods. Businesses today are dedicating more resources than ever to providing social and environmental benefits. Similarly, government and social-sector organizations are beginning to emulate for-profit businesses by adopting earned-income governance models as a way to acquire the necessary capital to sustain their social mission. The convergence of the mission and methods of these non-profit and for-profit companies is producing a fourth sector of “Fourth Sector” organizations, which pursue social purposes while engaging in business activities. For more information, click here.
The idea of a "social business" or "social enterprise" emerged as a topic of discussion among US non-profits in the late 1990's but often was cited in connection with "social entreprenuership" or "social innovation". The term "social business" was popularized in 2008 by Nobel Peace Prize laureate Professor Muhammad Yunus, and is described in his book Creating a World without Poverty - Social Business and the Future of Capitalism. In general, a social business is a cause-driven business focused on overcoming poverty or some other societal ailment. In a social business, the investors or owners can gradually recoup the money invested, but cannot take any dividend beyond that point. The purpose of the investment is purely to achieve one or more social objectives through the operation of the company, since no personal monetary gain is desired by the investors. Although a social business can use both a for-profit and non-profit corporate structure, most social entreprenuers world-wide choose to use the equivalent of a non-profit corporation due to the lack of sufficient government subsidies for social businesses.For more information, click here.
For-Benefit corporations:As social entrepreneurs and businesses attempt to surf the wave towards a Fourth Sector by seamlessly blending a social purpose with their business agenda, a collaborative effort has begun to develop the essential characteristics of an archetypal Fourth Sector organization, also known as a “For-Benefit” corporation. For-Benefit corporations are a new class of organizations that are “driven by a social purpose, they are economically self-sustaining, and they seek to be socially, ethically, and environmentally responsible.” A For-Benefit corporation represents a new paradigm in organizational design. At all levels, they aim to link two concepts which are held as a false dichotomy in other models: private interest and public benefit. Currently, the Fourth Sector community is building consensus around the essential characteristics for the For-Benefit corporation.
Benefit Corporation: is a new class of corporation that are required to create a material positive impact on society and the environment and to meet higher standards of accountability and transparency. Maryland became the first state to pass Benefit Corp legislation in April 2010. Vermont followed in May. Seven other states are interested for 2011, including California.
Flexible-Purpose Corporation: is a company proposed in California (SB 1463) which would allow businesses to codify their intent to pursue social or environmental good while also turning a profit. The basic concept is to allow for the formation of a business entity that allows directors to pursue profitability and a special purpose by creating a "safe harbor" for business directors..
B corporations: In order to assess and identify businesses that are trying to position themselves in the vector of Fourth Sector organizations, B labs, a 501(c)(3) non-profit corporation, developed a certification scheme, derived from S-Bar and other rating systems, which it uses to identify socially responsible for-profit businesses that it brands as “B corporations.” In order to be certified as a “B corporation,” a corporation must score eighty points out of two hundred on the B Ratings System, a survey to determine whether a corporation meets a set of social and environmental performance standards. Once the corporation has passed the B Ratings System, it must institutionalize stakeholder responsibility by inserting language into its corporate bylaws that allows directors and officers to consider the interests of all stakeholders such as employees, the community and the environment, in addition to shareholder interest. This may, in some cases, require c corporations to reincorporate into a state with a constituency statute. B Lab’s founders adopted their stakeholder accountability approach from Upstream 21, a holding company which pioneered the idea of incorporating stakeholder language in the articles of its portfolio companies. Once the corporation has become a B corporation, it must donate one-tenth of one percent of its revenue to B lab as a licensing agreement with B lab to use the B certification trademark.
Socially Responsible Corporations (SRC): proposed as a revision to the corporations code in Hawaii and Minnesota but this legislation has made no progress over the past two years.
Low-Limited Liability Company (L3C): is a form of limited liability company (LLC) that facilitatces Program Related Investments (PRIs). Like a traditional LLC, the L3C offers a flexible ownership structure, limited liability for the actions and debts of the company, and is classified as a “pass-through entity” for federal tax purposes. Unlike most LLC's, the primary purpose of the L3C is not to earn a profit, but to achieve a socially beneficial objective, with profit a secondary goal. L3C legislation has been enacted in Michigan, Vermont, Wyoming, Louisiana, Illinois, Utah, and North Carolina. Maine has passed L3C legislation that will become effectve on July 1, 2011.
Non-profit Limited Liability Company (Non-profit LLC's): is a form of limited liability company (LLC) with a non-profit business purpose. Non-profit LLC legislation has been enacted in Kentucky and Tennesse.
International Hybrid Legal Forms
According to the Research Collaborative Initiative (RCI), a report that surveyed 108 countries covering over ninety-six percent of the global GDP, with geographical representation on all five continents, the U.S ranked 18 just above Japan and China. Indeed, America is far behind in its efforts to promote responsible business practices. Some examples of international hybrid legal forms include:
The SCE was created in 2003 by Council Regulation 1435/2003 and entered into force on August 18, 2006. It is accompanied by Council Directive 2003/72 which requires active involvement of employees. The SCE, also created under article 308 of the EC treaty, can be a private or public LLC and must have at least 30,000 Euros as initial capital. The SCE should have as its principal object “the satisfaction of its members’ needs and/or the development of their economic and/or social activities.” The definition of a member includes suppliers, employees, and customers. These benefits should be based on the activities relating to a member’s volume of trade with the cooperative and not her capital contribution. Members of an SCE include suppliers, employees, and/or customers. In addition, the SCE must have limited interest on loan and share capital. The net assets and reserves of the SCE must be distributed on winding-up or dissolution according to the principle of disinterested distribution; that is, another cooperative body pursuing similar aims or general interest purposes. The SCE may not extend the benefits of its activities to non-members or allow them to participate in its business. Moreover, an SCE may only sell and distribute shares to its members. Where the national laws of the Member State in which the SCE is registered so permit, membership may be extended to ‘non-user’ members (investors not expected to use or produce the SCE’s goods) subject to the approval by the general meeting. The SCE may be formed by either natural or legal persons two of which MUST come from European Member Statesin five of the following ways. The SCE statute is the only statute which allows natural persons to form a European legal entity. Its form was specifically created to remove the need for co-operatives to establish a subsidiary in each MS in which they operate. Further, the SCE allows them to keep their legal identity and move their registered office freely from one Member State to another. Currently, there are more than 300,000 national cooperatives in every MS. As of February 2009, the commission has not yet published a detailed list of how many European cooperatives exist.
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