“ Benefit Corporations: A Panel Discussion of Social Enterprises and Funding Models for Not- For-Profits.” Not-For-Profit Leadership Summit May 2, 2016

Benefit Corporations: A Panel Discussion of Social Enterprises and Funding Models for Not-For-Profits Doug Singer, Esq. Bernadette H. Schopfer Ric Swierat Paula Barbag Derek Kolleeny Our Panel Not-For-Profit Leadership Summit-2016

Some Important Distinctions Benefit Corporation Certified B Corporation Social Enterprise

Benefit Corporation Attributes Public Benefit Purpose Fiduciary Duties Assessment Report

Mystery Numbers

Benefits of Benefit Corporations (& Other Social Enterprises) No tax or economic benefits Trust Millennials Employees Marketing/PR Partnerships

Some Possible Structures Division within the NFP Wholly owned by NFP Partially owned by the NFP Not owned by the NFP Relationship defined by Contract

Reasons to become a legislatively recognized benefit corporation v. a nonprofit.. Benefit corporations also offer advantages over non-profit status for some socially minded companies. Tax-exempt nonprofits have obvious tax advantages and can earn profits, but they cannot distribute their profits, as there are no shareholders. A benefit corporation can have shareholders, raise capital more freely, distribute profits, and pursue its for-profit business goals at the same time that it pursues its identified social missions or public benefits.

Does being a benefit corporation affect a company’s tax status? It doesn't. A company still elects to be taxed as a C or an S Corp or an LLC. Benefit corporation status only affects requirements of corporate purpose, accountability, and transparency; everything else regarding corporation laws and tax law remains the same.

Why might a Corporation be preferred to an LLC to achieve these objectives? An LLC could currently amend its membership agreement to incorporate any of the benefit corporation provisions. However, because LLC law is based on contract law institutional investors prefer the corporate structure, which is constructed in statute and case law, over LLCs. Any company with plans to raise outside capital or go public is better off with a corporate rather than an LLC structure. The benefit corporation thus provides the most effective corporate structure for scaling social enterprise and innovation.

LLC with social purpose LLC income is allocated to its members on a Schedule K-l and members owe taxes, whether or not they receive distributions. LLC members generally do not pay additional taxes on cash distributions. If a member receives additional payments of interest, rents, or royalties under a separate contract with the LLC, it pays tax on the net income. Benefit Corporation as a Subsidiary of a Public Charity Corporate subsidiary pays taxes on its own net income. Tax-exempt public charity shareholder pays no taxes on dividends. A tax-exempt shareholder that owns more than 50% of a subsidiary pays UBIT on interest, rents, and royalties that it receives (unless the income is substantially related). Benefit Corporation as a Subsidiary of a Private Foundation Corporate subsidiary pays taxes on its own net income. Private foundation shareholder pays 2% tax on dividends. A tax-exempt shareholder that owns more than 50% of a subsidiary pays UBIT on interest, rents, and royalties that it receives (unless the income is substantially related). StructureTaxable IncomeDistributionsInterest, Rent, Royalties

Inurement/Private Benefit - Charitable Organizations A section 501(c)(3) organization must not be organized or operated for the benefit of private interests, such as the creator or the creator's family, shareholders of the organization, other designated individuals, or persons controlled directly or indirectly by such private interests. No part of the net earnings of a section 501(c)(3) organization may inure to the benefit of any private shareholder or individual. A private shareholder or individual is a person having a personal and private interest in the activities of the organization.

Unrelated Business Income Tax Exceptions and Exclusions Investment Income: Dividends, interest, certain other investment income, royalties, certain rental income, certain income from research activities, and gains or losses from the disposition of property are excluded when computing unrelated business income (Debt financed income generally is UBTI as is income from Controlled Organizations). Volunteer Labor : Any trade or business is excluded in which substantially all the work is performed for the organization without compensation. Some fundraising activities, such as volunteer operated bake sales, may meet this exception. Convenience of Members: Any trade or business is excluded that is carried on by an organization described in section 501(c)(3) or by a governmental college or university primarily for the convenience of its members, students, patients, officers, or employees. A typical example of this is a school cafeteria. Selling Donated Merchandise: Any trade or business is excluded that consists of selling merchandise, substantially all of which the organization received as gifts or contributions. Many thrift shop operations of exempt organizations would meet this exception. Bingo: Certain bingo games are not unrelated trade or business.

Unrelated Business Income For most organizations, an activity is an unrelated business (and subject to unrelated business income tax) if it meets three requirements: 1.It is a trade or business, 2.It is regularly carried on, and 3.It is not substantially related to furthering the exempt purpose of the organization. There are, however, a number of modifications, exclusions, and exceptions to the general definition of unrelated business income.

Corporations and LLCs C Corporation The company is taxed S Corporation (not flexible) Income passes through business to shareholders Limited Liability Company (flexible) Income passes through business to members like a partnership, but provides members with liability protection like a corporation

Social Enterprises-Case Studies Why Social Enterprise? What is the Value Proposition? Look back, what would these organizations do differently? Helpful Tips–recommendations (Click the arrow when in Slide Show mode) Greyston Bakery Mary’s Secret Ingredients Good Reasons Tom’s Shoes

Greyston Foundation Greyston is a not-for-profit organization grounded in a philosophy called PathMaking, to create jobs and provide integrated programs for individuals and their families to move forward on their path to Self-sufficiency. Greyston Bakery is a B-Corporation, a leading model for social enterprise building a coalition with employees, community and shareholders. Value Proposition: A profitable business, baking high quality products To create jobs and provide integrated programs for individuals and their families to move forward on their path to Self- sufficiency. Value Proposition

Community Based Services is dedicated to providing individuals with autism and other developmental disabilities the best possible quality of life through residential and community-based opportunities. Good Reasons is a not for profit dog treat company that provides employment opportunities to people with autism and other developmental disabilities. Value Proposition

Mary’s Secret Ingredients Unique and perfect sampling and marketing service that addresses the needs of food manufacturers and consumers, and to eradicate worldwide hunger through feed the Children A for-profit business that addresses three (3) needs: For Food Manufacturers: an innovative platform to distribution channels at very low cost. Delivering market intelligence, specialized content and big data for customer profiling and business growth. For Consumers: healthy new products and ingredients to inspire their cooking For the World: Making meaningful contributions toward eradicating worldwide hunger through partnership with Feed The Children Value Proposition

Richmond Community Services in partnership with all members of the community, supports children and adults with developmental disabilities and their families Business Type? Value Proposition? –Recommendation Test Case

Look back, what would these organizations do differently? “What did these organizations gain and what was the trade off? “

The Arc of Westchester Ric Swierat

Benefit Corporations: A Panel Discussion of Social Enterprises and Funding Models for Not-For-Profits Doug Singer, Esq. Bernadette H. Schopfer Ric Swierat Paula Barbag Derek Kolleeny FOR MORE INFORMATION CONTACT ONE OF OUR PRESENTERS Not-For-Profit Leadership Summit-2016