Benefit corps, L3Cs, social purpose corps, LLCs, partnerships, OH MY! There are tons of options when determining what type of business entity you should select for your business.
How do you choose?
Know your objectives
When selecting a business form, first determine your business objectives.
- Financial Capital: What are your sources of capital? What do the sources care about most? What are they going to want accountability for? (If the business has owners that want to maximize their value, check out this forms of business comparison chart.)
- Human Capital: What motivates the associates? How will their interests be acknowledged and pursued?
- Revenue: Who are the customers? What is their ability and probability of paying for good/services? What are their prospects for repeat business? What do they care about most? (If the business has charitable purposes, will not distribute profits and has no owners, look into starting a nonprofit organization.)
Research hybrid business structures
If your business objectives fall somewhere in the grey area (i.e., your business is charitable, but you want to make money), there are hybrid business forms that may be better options for you.
There are three main hybrid business forms. John E. Tyler III with the Kauffman Foundation provides a chart for comparison purposes and details are outlined below.
- Benefit Corporations – formed to provide a general public benefit and may provide a specific public benefit. Benefit corporations provide maximum flexibility of decision making; however, directors must consider the impacts of their decisions on: shareholders, employees, customers, community, society, the environment and purposes.
- Social Purpose Corporations – directors must identify one or more special purposes (employees, suppliers, customers, creditors, community/society, environment or charitable purposes) that can be prioritized in addition to or at the expense of shareholder interests. The company must disclose its objectives, goals, standards of measure and impact.
- L3Cs – must be set up for charitable purposes and cannot maximize owner value; however, profits may be distributed to owners.
Please note, any business form may be a “B Corp.” This is not a business form, but a certification given to companies that voluntarily meet higher standards of transparency, accountability and performance.
Blog post written after attendance of “The ABCs of Hybrid Business Forms” with John Tyler, general counsel and secretary at the Ewing Marion Kauffman Foundation.