Ownership StructuresOwnership Structures
Three different types of social enterprise ownership structures exist: private, public and collective. Ownership can be either a driver for a social enterprise's legal structure or a determinate of it. In most counties nonprofits are considered "public good" or property of the public, thus calling into question the legal ownership of their assets, goodwill, brand, etc.
Public ownership may be practiced in the form of decision-making and participation as long as the organization is a going concern. Similar to traditional nonprofits, a public ownership structure indicates that governing board of directors directs strategy and financial oversight. Legally, nonprofit ownership becomes an issue if the owner(s) wants to sell the social enterprise, or close it and liquidates the assets.
Private ownershipof a social enterprise offers benefits of equity financing, unambiguous asset ownership and valuation, and the freedom to sell the enterprise. Conflict can arise between fundamental motives of profit-making and mission. For-profits must minimally breakeven and often have tax liabilities, limiting the type and purpose of the enterprise to more productive and financially driven models than those that may serve a social need, yet run at a deficit.
Nonprofit Organizations -- the classic nonprofit organization is considered "public good," or property of the public. Nonprofits may own a for-profit or nonprofit social enterprise subsidiary. In the case of the for-profit, the nonprofit may sell the subsidiary or its assets, or raise equity for new investments; whereas the nonprofit subsidiary may raise charitable funds, but not equity and is subject to donor requirements and nonprofit law regarding ownership of assets and use of revenue. The nonprofit parent of the nonprofit subsidiary may acquire the assets of the social enterprise if the business fails or is closed.
Public Shareholders -- a consortium of nonprofit stakeholders that "hold shares" in a social enterprise (nonprofit or for-profit). Often the shareholders are comprised of parent organizations, partners and donors that have an existing program or financial stake in the social enterprise. Legal issues are similar for other public entities under this ownership structure. The public shareholder model is frequently used as an exit strategy when a parent organization seeks to spin off a social enterprise into an autonomous legal entity, yet wants to maintain some decision making power and preserve the mission during the transitional period to independence.
Nonprofit cooperatives are a common form of social enterprise particularly in developing countries. Driven by their social mission, most nonprofit cooperatives have a legal incorporation similar to other types of nonprofits, and are thus entitled to similar benefits as well as limited by similar restrictions as nonprofits. In practice, owners are "members" of the nonprofit cooperative and though they may have programmatic and business decision-making authority and realize certain advantages, they do not actually own the brand, infrastructure, assets, methodology, programs, revenue, etc. and do not enjoy private property ownership rights. The nonprofit cooperative requires oversight by a board of directors. The target population is the nonprofit cooperative’s membership; members realize social benefits, but do not receive income distributed from business activities.
For-profit cooperatives -- "cooperatively" or group owned social enterprise registered as a for-profit is age-old structure in both developing and industrialized countries. These cooperatives are profit-driven structures whose social contribution is aimed at improving economic conditions of a particular group, such as farmer or artisan cooperative. Often for-profit cooperatives (such as Equal Exchange, our example of Embedded Social Enterprise) are worker owned. Owners may also be called members and exercise legal rights and decision-making authority tied to property ownership: to sell, dissolve, liquidate the business and its assets, or expand the business and use revenue as they see fit. Owners may elect distribute profits to themselves or retain earning to reinvest in their business.
Sole proprietorship -- in several emerging-market countries social enterprises are owned by a single individual to bypass laws restricting nonprofit commercial activity. In this situation the social enterprise owner is often the parent organization's executive director or a member of its board of directors. This structure introduces a risk of the business being cannibalized by an unscrupulous owner. Unfortunately in many countries, until the legal environment becomes more enabling, this is the only ownership option available. These entities though created to support a nonprofit are subject to local taxes and laws governing private businesses.
Private Shareholders -- in developing countries, the financial service industry is the leading example of shareholders and investor ownership of social enterprises (microfinance institutions, community or rural banks, credit unions, etc). Microfinance organizations that successfully commercialize their services and transform into for-profit financial institutions may sell shares to individuals, the government, other nonprofit organizations and donors to raise equity. Public sector owners are not required to be stakeholders in the parent organization or social enterprise other than as a social investor. Ownership shares may also be distributed to the target population as part of the social model. For example, when the Grameen Bank project transformed into an independent bank, it distributed 90% of its ownership to the poor rural borrowers its serves, while the remaining 10% was purchased by the government.
Benevolent Owners -- private ownership of social enterprises generally falls under the rubric of socially responsible business. In industrialized countries there are a growing number of small businesses created for the purpose of contributing to a social cause and generating revenue for their owners. In the United States, practitioners have formed their own industry organization: Social Venture Network. These businesses operate in accordance to standard laws for small business. For more information, see also the Business for Social Responsibility web site.