Business for Social Welfare or Social Consciousness

Dec 16, 2016

People who desire to put their talents to use with a business that has endeavors of a greater good can find refuge by forming a legal entity tailored for the purpose of the social interest. Consequently, two types of legal businesses: the IRC 501(c)(4) Social Welfare Organization and the Certified Benefit Corporation(tm) (a.k.a. B Corp) may come to mind. The decision about which entity to form can be complex as it depends on many factors. Seeking the advice of a business lawyer can be helpful when navigating the rules related to forming the right business structure for your cause.

The Difference between Social Welfare and Social Consciousness

When thinking about forming a business that promotes social welfare, the business purpose may be derived from broad and diverse group of ideas such as improving the environment, addressing hunger, or taking action to prevent or address child abuse with a principal feature of the business being a lack of any private benefit or profit. A socially conscious business may operate as a for-profit business while making a deliberate effort to improve the quality and safety of its products for an interest in a community beyond its customers and shareholders.

The IRC 501(c)(4) Social Welfare Organization

When seeking tax exempt status, the definition of social welfare can become somewhat less broad. Consequently, Section 1.501(c)(4)-1(a)(2)(i) of the Income Tax Regulations states that an organization will be considered to be operated exclusively for social welfare purposes if it is primarily engaged in promoting in some way the common good and general welfare of the people of the community, i.e. primarily for the purpose of bringing about civic betterments and social improvements. An organization is not operated exclusively for the promotion of social welfare within the meaning of section 501(c)(4) if its primary activity is carrying on a business with the general public in a manner similar to organizations that are operated for profit. Treas. Reg. Section 1.501(c)(4)- 1(a)(2)(ii). Because of the complexities that can be involved in establishing and maintain an IRC 501(c)(4) entity, the first steps should be related to planning and strategy. 

The B Corporation

A Certified Benefit Corporation(tm), or B Corp is not really a legal entity itself. In fact, even an existing company could obtain a B Corp. status. Becoming a B Corp. requires joining a private organization and meeting and maintaining this organization’s certification requirements. For an annual fee, the B Corp. organization offers “proof” of a good company in the way that other organizations certify products, such as Fair Trade Certified and Energy Star. For-profit businesses seeking to promote themselves as taking a socially conscious position can seek B Corp. certification. Because the certification may require revisions to a company’s governing documents, potential risks and liabilities may be created that should be discussed with the company’s business lawyer.

When planning to structure a legal entity, there are many considerations including whether to form a not-for profit social welfare organization or a for-profit socially conscious business. To help ensure that the business and social goals will be met, it can be helpful to employ the services of a business attorney to help navigate the complexities of business formation.

By: Brian Kirkpatrick