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A community enterprise corp for Ontario? A response

MaRS has recently launched a White Paper on Legislative Innovation that is proposing that Ontario create a new legal form to hold activities that would be undertaken by what we would call a social enterprise or perhaps a social purpose business. They are using the term Community Enterprise. This is builds on Stacey Corriveau and Richard Bridge's piece on Legislative Innovation for Canada.

These are both important contributions to a conversation that continues to emerge in this country. However, before we come up with a new legal form, I think that it is worth looking at the forces at play that would make one want to put so much time into this space. I guess that there is a part of me that would love to see all of this energy actually put into creating social enterprises. Perhaps this is an enabling condition. I guess that this is the question.

Arguments include:

1. Access to capital - Well, given that I have been attempting to raise $6m in under 6 months to buy a building as a nonprofit organization, I have a lot of opinions about this topic - but they would take a series of blog posts and I am only doing that once I have the money in hand :). I will say that money follows good ideas no matter what their legal form. Would it be nice to have access to more money? Of course. I would like to see tax credits for social enterprise, a PRI that would actually make sense and work in this country. My concern is that in the UK, it sounds as though the CIC hasn't been terribly effective in raising capital because the government failed to attach the tax incentives to the model. To me this is key. What we need is the ability to attract new dollars to the sector. Tax incentives that do this could easily be implemented in a way that supports investment in current non-profit legal forms.

My brother-in-law, an investment banker in BC and Paul Martin, former Prime Minister, have both suggested that social enterprise should have something akin to the mining exploration tax credit which actually creates a generous tax benefit for those that are investing in high risk social benefit investments. I would love to see more policy thinking and research going into this.

One of the things that I have learned in the last 8 weeks is that it is all about risk. As an entrepreneur, I don't see the risk the way that investors do, but they sure want their money back :)  I think that we have to grapple with this issue as a part of the access to capital item. If forming a new legal form will help this, that's helpful. But it's not clear that this will be the outcome.

2. Simplicity of Legal Form - there is a sense that in order to do what we need to do, especially as charities, that we need to contort ourselves into various forms and confusions in order to operate a social enterprise. The administration of managing these contortions is cumbersome. There is some truth to this. But I will also say that business does this all the time. They often have holding company after holding company. There are whole industries constructed to help us make sense of how we can structure a deal and they can be intensely complex.

One of the things that I don't feel has been adequately explored is the role that the nonprofit legal form plays in all of this. Certainly, charities have restrictions and given the tax benefit that they offer to donors, this makes sense. However, I have found the nonprofit legal form in Ontario to be flexible, to offer the marketing benefit, to be able to attract many types of grants and to enable us to deliver on our public benefit. It only costs $135 to create, you need 3 volunteer directors and you are good to go. Nonprofits can issue debt, can buy buildings, have a buit in asset lock, can issue community bonds, can own an equity issuing for-profit and are required to deliver on their social mission. I wonder if the lack of a non-profit legal form of this nature in the US and UK was made them feel the need to create CIC and LLCs? Maybe we're already sitting on the solution -- using our existing Ontario non-profit legal form as the basis for social enterprise.

Now, I will say that I am coming from a nonprofit perspective. Were we a social purpose business, I think that I would tend toward the voluntary 'B Corp' model because it is rigorous, offers me access to an exclusive club, has great brand recognition well beyond we policy geeks and means that I have the full flexibility of a regular business. I guess that it calls us back to what problem we are trying to solve.

3. Pressure from the regulator - now this is a big one. And for this issue alone, it may be worth investing our time and energy into a new legal form. However, the specifics of the strategy matter. It is increasingly clear that the Finance Department has gotten wind of social enterprise and social entrepreneurship and they are coming down on it. They don't understand what it is and they seem to be looking for ways to prevent anything that might look like profit. This calls into question the fundamental role of government.

Government has been downloading or neglecting service delivery into the nonprofit sector: services that they should have been delivering. Then they starting reducing funding without decreasing the demand for services. Then they say that we aren't accountable. They increase the pressure to fill in forms. And then, when we come up with new ways to generate revenue to cover those costs, they say we aren't allowed to intend to generate a surplus even if that surplus is simply meant as a buffer against financial uncertainty. Any non-profit (or for-profit!) organization in the world knows that it is the sign of a good and healthy organization to save a bit for a rainy day. The relationship between CRA and the nonprofit sector is bordering on the absurd when we start seeing this in the sector. (Several blog posts have been done on this and the work of ONN is key to this.)

Yesterday, the Speech from the Throne talks about removing red tape to enable charitable and community based innovation. This is a great great sign. Let's hope that one department is talking to the other department and that it gets turned into action.

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A couple of questions about the MaRS recommendations for a new CEC. Would it be a tax paying entity? Would it be able to apply for grants that are currently available to the nonprofit sector? These are critical questions that go to the core of what it means to be a non-profit now in Ontario. Or would it be ideally suited to give credibiltiy to those that would otherwise become for-profits? Who is this meant for?

My recommendation is that we take a wholistic approach to legislative innovation. It is challenging to create a new legal form without being clear about the impact that it will have on the wider sector. When we look at enabling social enterprise or community enterprise, I would like to see it not with a comparison to the UK and UK, but rather in comparison to what we already have and with a look at what we can already do. I am not against a new legal form. It could be exactly what we need. But I worry about more confusion, more delays, more red tape and less action.

My other recommendation is that we focus urgently on building social enterprise skills and opportunities. For example, we could have a national social enterprise program modeled after the Federal self-employment development initiative to pay the salaries of social entreprenuers for up to a year as they start their social venture - regardless of nonprofit or for profit. Or, we could have something like Ontario's old Environmental Youth Corp program, where young social entrepreneurs could be paid to work with nonprofits and charities to begin revenue generating businesses and to help transform the cultures of these older organizations. Approaches like these could attract new talent into our social benefit sector. And, they could start immediately, without the creation of a new legal form.

The social enterprise space is emerging and evolving. New legal forms may need be part of this, or they may not. The point is that we need to look at the big picture -- and the points of biggest leverage -- before we push ahead on specific projects. And we need to think carefully about the implications of the paths we choose.

 

 

 

 

 

 

Comments

Social innovation is deeper than funding.

Tonya,

Glad to see this debate in public.

From the entrepreneurial perspective, of course we can make do with whatever legal structure exists. By definition, entrepreneurs are people that make something happen with whatever they happen to have. This however does not mean that what we have is sufficient or that work to create a new structure is not a productive use of resources.

Some of the deepest forms of social innovation come from changing the structures of our society. If we look at our current legal structures which are oriented around either profit (for/non) or ownership (co-op/LP) it's not too difficult to see how they've shaped organizational cultures and sectoral mindsets.

Fundamentally, the conversation around legal frameworks is much more than than an effort to find ways to raise more money. It is a conversation about the very purpose of organization.

As an entrepreneur, I don't have the stomach to push this stuff forward, but I have come to respect and be thankful for the work of those that do. They are taking a step back and pursue social innovation at a structural level, pushing past incrementalism and investing in fundamental change. And, with where we find ourselves in 2010, we need everything everyone can give and then some.

focusing on market solutions....

Tonya, Liz, Tim, et al,
This is an important discussion… but the discussion of a hybrid model as presented by MaRS White Paper, Stacey and others keeps addressing an “answer” to what I think Tonya has asked the right issue: “what is the question”? Can someone tell me about at least three actual examples where the current options did not provide a good option of incorporation? Or examples of where a hybrid would have actually offered a better solution? Isn’t it always part of business plan, for profit or not for profit, an issue to answer the tough question of the best and most appropriate business incorporation model to address investment options, return on investment goals, where business and mission objectives are blended? Tim points to all the options that are available now, (for-profits, co-operatives, non-profits, trusts, etc.) how does adding another option solve the questions?
Tim actually gets closer to the real issue; we need a comprehensive framework to support social enterprise. I would suggest more energy be spent on how do we increase social purchasing by private, public and non-profit organizations? If we could direct significantly more purchasing to social enterprise the market demand would create a market situation that would likely remove issues of incorporation to addressing real issues of production and fulfillment. Or how about access to investor tax credits that other business sectors have access to, that will change the investment options and return to investors, regardless of the incorporation model. Let’s examine what are the real risk factors we are trying to mitigate, the business skills we need to develop in the non-profit sector, the optimal investment opportunities, and market development challenges before we come to conclusions on a hybrid answer that, at best, may be only a piece of the puzzle, not an overriding solution, to the challenges and opportunities of social enterprise development.

During the last 30 years

Good day
WOW thanks Tonya for your blog... and others for commenting.
This blog brings some clearity. I have been supporting social enterprise development in Ontario and in different part of Canada for the last 30 years. Any group I was working with, never had problem to find the right legal structure to create their social enterprise... I was one of the lucky one who went to Scotland and Australia for the 1st and 2nd Social Enterprise World Forum, and since some canadians were promoting some new structures - I consulted some key people there - I won't write everything I learned from theses discussions but simply - it seems no matter if they created a new structure it is still not as popular at they were thinking it would be. Maybe I did not understand well and I don't know all the reasons as well!
also when I explained the Canadian context and legal opportunities for social enterprises - they were the first one saying " you do have many options in Canada to start social enterprise"...
and I am sorry but I am agreeing with David, the major issues right now it is market opportunities but also: technical assistance(having more intermediaries who can provide professionnal technical assistance), capacity building (training & education), adequate and various funding and financing mechanisms (including investors tax credit), public policies at all level governments (municipal, provincial and federal) and finally movement - networking amongst social enterprises, promoters, intermediaries, funders and investors, etc...
Finally, I know some will say AGAIN THE QUEBEC EXPERIENCE but please ... try to answer: How come in quebec it flourish so well and so fast???
well... just look where the movement is investing its time?
Sorry for my bad English... and Non I am not from Quebec - I am from Ontario!

Shaping the regs and tools we need to succeed

Thanks Tonya for blogging about legal forms and what they need to be truly effective for social entrepreneurs.

Thanks too for bringing to everyone’s attention the federal government’s recognition of some of our pressing concerns.

Throne speeches are by their nature telegraphic. Last week’s signals that there is important opportunity for us to advance our enterprising non-profit agenda for an enabling regulatory regime. People should check out Al Etmanski’s blog on the topic. (http://www.planinstitute.ca/blogs/aetmanski/ottawa_throne_speech_faint_h...) As the catalyst for Canada’s latest social finance innovation, the Registered Disability Savings Plan (RDSP), Al is an insightful commentator on national policy trends.

I have to admit that I do not understand your comment on the hybrid forms that you “would love to see all of this energy actually put into creating social enterprises.”

As I see it, the discussion of a specific notion of a CEC or a CIC or L3C is really just a small part of a much broader canvas of the need to get our regulatory house in order (simplifying things and removing barriers) and properly aligning fiscal incentives for our work.

Having said that, the debate and promotion about new legal forms has many salutary benefits. It:

Raises knowledge and understanding among social entrepreneurs (launched and budding) about how to choose among the existing legal forms (charity, non-charity non-profit, for-profit subsidiary, trust, etc. etc.) When I think about what is taking up energy, I think about the time I spend helping people sort through the existing awkward institutional forms and how to choose the lesser of evils. Deficient options too often force people to cope by either a) using duct tape and overly complex institutional design or b) carrying on “as is” even though the enterprising practitioners discover that they aren’t compliant (as a charity with CRA Charities Division’s earned income rules or as a non-profit with CRA’s non-profit “profit” rules). Anecdotal evidence suggests non-compliance might exceed one-quarter of non-profits’ enterprising activities.

Sharpens our community’s thinking on what would be desirable; this is assuming (and I do) that we can shape our environment as our movement grows and develops clout.

Focuses attention on the dysfunctionality of Canada’s charity regime and the pressing need for reform

Opens up an important dialogue with government and business on the emergence of the hybrid space that breaks out of the bi-polar world of “non-profit” and “for-profit”.

This is a really exciting time for our sector and society. Especially as non-profits gain confidence about how, as Richard Steckel says, they can improve their brain and brawn (their enterprising prowess) without damaging their heart (social mission). To me it seems that the future portends an evolution of institutional forms and their diversity.

The future pathway will boast new incorporation models flexibly responding to evolving needs as we experiment with new forms of partnership arrangements within the public benefit sector (charities, non-profits, socials enterprises, co-ops, social economy entities, foundations, charitable trusts, etc) and outside working with entities of the private sector and government.

Do hybrids pervert capitalism?

South of the border this discussion is getting bizarre: Rush Limbaugh complains about the US hybrid, the L3C or Low Profit Limited Liability Company. He says that the L3C was designed by “wackos…to pervert capitalism. It is to corrupt the private sector and to change the mission.”

I look forward to continuing our more informed Canadian dialogue about how we shape institutional instruments, like hybrids, to advance sustainable community well-being.

Legislative Innovations

For those that have not had time to read the white paper, this may be helpful

Legislative Innovations.

MaRS has launched a series of white papers related to promoting social entrepreneurship in Ontario and enabling solutions to complex social problems.

The first white paper was focused on Social Venture Finance http://www.marsdd.com/buzz/reports/socialventurefinance and the latest one is on Legislative Innovations http://www.marsdd.com/buzz/reports/sociallegal. This blog details the content of the Legislative Innovations white paper.

This white paper was prepared by MaRS and Ogilvy Renault LLP with the primary objective to increase capital directed at the community for delivering social and/or environmental benefits and two secondary objectives, to simplify and clarify the legal structures and permitted activities by creating a new form of legal vehicle and to provide a brand for social enterprise, social finance and community benefit, thus providing legitimacy and enhanced profile for such activities.

Federally and in Ontario, there is currently no legal definition of a Social Venture, Social Enterprise or Community Enterprise and those social entrepreneurs operating social ventures have set up under a variety of different legal forms to accomplish their missions.

For MaRS, social ventures include both non-profit, revenue generating social enterprises and for-profit, social purposes businesses.

For this white paper, we recommend the use of the term Community Enterprise for ventures that achieve their primary social or environmental missions using business methods by applying market-based strategies to address social problems. This definition is based on the work of Richard Bridge and Stacey Corriveau for the BC Centre for Social Enterprise: Legislative Innovations and Social Enterprise: Structural Lessons for Canada. February 2009 www.centreforsocialenterprise.com/f/Legislative_Innovations_and_Social_E...

In order to examine what could be, we start by examining what is and outline the current legal structure in Ontario and Canada: for-profit corporations, not-for-profit corporations, co-operative corporations and registered charities. It’s a great primer for those new to the field and a wonderful refresher for the rest of us.

We also explore issues related to the use of a business trust as an intermediary. One of the many workarounds used by those trying to make money and make a difference.

The paper then addresses the rationale for choosing which legal structure is best for your purpose by asking the entrepreneur to consider what is the underlying nature and intent of profit-making activities of the operation and what will the profits be used for?

We then break down the answers to this question and considers the pros and cons of each structure based on the intention to make profit. There is a terrific summary on the limits of each structure particularly as it comes to generating income. It outlines the challenges faced by many and the risks to tax-exempt status if you actually make a profit. For example, a NFP could lose the tax-exempt status if the “accumulated profits are beyond what CRA believes is required to operate the NFP or if such accumulated profits are for the purpose of funding future capital projects”. Although social entrepreneurs can “find a way around” these challenges, they shouldn’t have to – we want to design a system that actually encourages people to make money and make a difference.

There are several pending updates to legislation in Ontario and Canada, which is then outlined along with what is expected and one such change that has already happened since the publication of this paper. Thanks to the efforts of our colleagues at Imagine Canada the disbursement quota for charities was recently lifted in the federal budget, an absolute step in the right direction.

We then look to the UK, who has been operating Community Interest Companies since 2005 – there are about 3,500 currently in operation. We see this as a great opportunity to learn from our colleagues there; what worked and what didn’t. We have done this before, bringing thought leaders from both the UK and the US to Ontario to outline their experience so we can learn from it and accelerate our learning in Canada. http://www.marsdd.com/socialfinanceforum.

Let’s be clear, this is not an importation of the UK system, in fact there are many differences - for example, the UK has a “destination test” to determine where the profits will be directed from the revenue generating activities of charities, something we don’t enjoy in Canada - but rather an attempt to bring the best practices to our social entrepreneurs, modified to meet our needs and reflecting the Canadian experience.

We do the same thing with the US discussing both Low profit limited liability Corporations (L3C) and B Corporations.

For people interested in B Corporations – think a set of ISO standards for social purpose ventures – please join us on April 1, 2010 as the Sustainability Leadership Exchange (SLX), MaRS and several other partners, bring Jay Coen Gibert, B Corporation founder, to MaRS. http://www.marsdd.com/events/details.html?uuid=b8238ed8-563b-4758-9737-7...

The paper then discusses Program Related Investments or PRIs; this is a potential source of funding as we try to enable foundation to use their endowments (not just their grants) to support social purpose work. See this blog from Causeway Coordinator, Adam Jagelewski for more on this topic. http://www.marsdd.com/blog/2010/02/09/new-capital-on-the-horizon/

We then offer an analysis of the pros and cons of the CICs and L3Cs in terms of their ability to attract investment, governance/ oversight and implementation in Ontario.

Finally, we end the paper with a recommendation for Ontario and the federal government with the conclusion that an opportunity exists to capitalize on regulatory changes that have taken place in the UK and US and the experience they have gained implementing those changes. Their knowledge can be used as a base to effect change in Ontario that will assist social entrepreneurs to raise the necessary capital to scale their business activities. Ogilvy Renault LLP and MaRS will present the recommendations in this white paper to the Ontario government and stimulate a dialogue between government leaders and policy makers, members of the social enterprise community in Ontario and those that have lead the way to hybrid corporate legal structures in the UK and US.

To reiterate, this paper is designed to “stimulate a dialogue” on this topic. As it is our mandate at MaRS to act as a “think and do tank” on issues that promote social entrepreneurship, we are very pleased to have had the opportunity to conduct due diligence on options for our emerging sector. This structure may work for you, it may not, but a Canada based on choice, a Canada that presents options to make it easier to make money and make a difference, that’s the Canada that at least, deserves a chance to emerge if not flourish.

Now it’s your turn, let’s hear what you have to say.

steps to social enterprise

Hey Tonya
Great to see that the debate about social enterprise is moving along and MARs is weighing in. You're absolutely right that the structure still needs work with your final comments being paramount - access to grants and the business tax structure.
Allowing social enterprises to access grants - albeit modified grants - is essential. I think they should be incentive based or similar to grants within BIAs in Ontario where they are based on matched investments made by the SE. Grants allow SE to offer the value added service that will make them competitive, while remaining appealing to investors who expect and deserve returns for taking the risk.
It's also key to sort out the tax relationship and GST/HST implication. Again a review of the modified risk associated with SE should bear a new structure for taxation.

What are the chances of bringing you and SE folks to Hamilton to do a review of where we're at in Canada?

Jeremy

SE in Hamilton

Hi Jeremy,

Great to hear from you.... the issue of taxation is an interesting one. Having run a for-profit and several nonprofits, the issue is really predictability and planning. While, in theory, I have no problem with the idea of contributing our fair share of taxes on surpluses, there is another side of me that says that we (the leadership of our SE's) should benefit from some incentives in our work to deliver public benefit and to help reduce the load on what would otherwise be carried by government.

Given that the asset lock of a nonprofit means that there are no profits to distribute and that we are required to reinvest every surplus dollar in fulfilling our social mission, I am inclined to stick with our current system.

Lynn Eakin has been doing some interesting research about how much revenue the public coffers are impacted by different legal forms. What would be even more interesting would be to look at how social enterprises reduce the load on government through their self-sustaining or reduced cost services. I wonder how many of our members would otherwise be on Employment Assistance were there not an affordable space in which to pursue their entrepreneurial effortts. Or how many jobs are created by virtue of the support that we offer (at virtually no cost to the public).

What is the SE scene like in Hamilton?

Tonya

Learn from our community

Tonya, thanks for this thoughtful discussion. I too feel that there may be a role for a separate legal entity but not convinced we've done the work to demonstrate that need. Like you, I have questions about whether the limited, and almost non-existent resources available to social enterprises, are best directed to this investigation at this point in time, particularly when there is such a great need for skill development opportunities. And, if we are going to go down this road, I believe we'd get enormous value from moving the discussion from its current focus on structure to a focus on developing a case that is informed by the practiticing community. I'm prompted to say this for many reasons but one of the biggest is that the enterprises we work with are dedicated to the development of competitive businesses in the market place and to that end may be concerned about the brand value (or negative brand value) created through the use of a separate legal structure. For example the majority have shunned the use of the .org tag for a .com preference in order to communicate an appropriate message to their market. Regardless, I want to know what their thoughts are and would they use it.

A final quick thought is whether this structure is really able to add any further value than would be created through the use of tax credits, and if not, are we prompting the development of a culture that says it's okay to be "less than" if you're a social enteprise?

Learn from our mistakes....

Couldn't agree more Tonya. It's also about where resources (which are scarce) are focused. It may be that a new legal entity / structure is required, but there are many in the UK who felt that a CIC wasn't necessary and (as you say) its success has been 'qualified' or divided opinion at best. Recent changes to the dividend caps etc may result in more social investment, but many social entrepreneurs here have found CICs falling between two stools: not able to get pump-priming grants (as they are not a registered charity) and not able to get social / blended return investment (because of the caps on dividends / financial returns).

Those who are more favourable to the CIC structure in the UK would say that it also erred in not having a marketing budget to match that that went into developing it....though the start-up / registration rate has not been bad.

It has to be about it being fit-for-purpose though: inevitably, there is a variety / spectrum of legal, financial and governance options. Choosing the right ones is the key, rather than adding many more....

Your Ideal Form?

Hi Nick,

So glad that you have commented... and I would LOVE to hear from other Brits with their opinion.... if you could do it all over again, what would your ideal legal form look like? What would you invest in?

Tonya