Today’s guest columnists are Patrick J. Murphy and Jonathan Murphy.
In January 2021, a law went into effect in Alabama that allows the formation of a new kind of business entity called a “benefit corporation.”
Forming a benefit corporation allows a business to pursue financial value and social value simultaneously, without violating its fiduciary obligations to its shareholders.
As an endowed chair professor and director of entrepreneurship at UAB who has trained entrepreneurs around the world for decades, and as an Alabama attorney well-versed in the new law and active in growing the state’s entrepreneurial ecosystem, we are excited about this news and what it means for the future of entrepreneurship in our state.
Benefit corporations will expand the capacities of Alabama entrepreneurs to make a greater impact on their communities. The percentage of entrepreneurs who want to “do good and do well” has already been rising for decades. This trend is strong in Alabama.
As Generation Z enters our universities and the workforce, the trend will become stronger in our state. Greater numbers of entrepreneurs will seek to serve communities while making a good living for themselves. Compared to previous generations, entrepreneurs of the next generation do not differentiate nearly as sharply between financial, social, and environmental value.
Benefit corporations allow for businesses to integrate multiple kinds of value generation into their operations more seamlessly. This integration can make it easier for Alabama entrepreneurs to raise money from investors who want to generate returns while making a positive impact on society or the environment. It also bolsters the ability of more established companies in our state to recruit young entrepreneurial talent that values purpose at least as much as profits.
The Dynamic Blend of Purpose and Profit
Mission-driven entrepreneurs have historically had to choose between establishing either a for-profit business or a nonprofit organization. Each option tends to gear an entrepreneurial venture toward one of two different types of value generation: generating profits or serving society. To bridge the gap between these two types, some entrepreneurs found “hybrid organizations” that align a for-profit operation and a nonprofit organization. This approach entails a for-profit business cross-subsidizing nonprofit activity. However, these hybrid arrangements carry inefficiencies. From an entrepreneurial perspective, they also limit the adaptive capacities that enable a venture to grow, compete, and perform at world-class levels.
These inefficiencies and adaptive capacity issues are complex. They emerge in operational and structural ways because hybrid organizations integrate contradictory organizational logics. Simply put: for-profit and nonprofit activities can (and do) clash with each other, and the clashes can limit a mission-driven organization’s effectiveness. The problems can also become legal. The IRS rules governing tax exempt organizations tend to hinder highly profitable business activities. Moreover, it has been found many times in the courts that the fiduciary obligations of a for-profit company require maximizing profits for shareholders, potentially at the expense of its social or environmental mission.
Caught in the middle, social entrepreneurs often struggle to balance the dueling priorities of for-profits and nonprofits. They incur hindrances to success and barriers to impact no matter which of the two options they choose. For hybrid organizations, the balancing act can eventually become unsustainable.
Social Enterprises and Benefit Corporations
Benefit corporations help create a third option that mitigates the need to balance dueling priorities. They are an ideal type of organization for “social enterprises.” Unlike hybrid organizations, social enterprises utilize one operational model to generate more than one type of value: economic, social, and/or environmental. These three value types are known as the “triple bottom line.”
For-profit businesses serve customers in specific markets. Similarly, social enterprises serve members of specific communities. However, social enterprises earn fee-based revenue in ways that go beyond traditional commercial frontiers to make an impact in the social or environmental realms.
Unlike a tax-exempt nonprofit, benefit corporations can raise investment capital, generate returns for investors, and achieve the financial self-sustainability that can be elusive to nonprofit organizations. Moreover, unlike for-profit businesses, benefit corporations signal legitimacy to the growing number of large investment funds that only do deals with entrepreneurial ventures that can demonstrate a positive social and/or an environmental impact.
For example, consider a local entrepreneurial venture that sells honey and honey-based products. This hypothetical venture has beekeeping operations in multiple locations, known as apiaries. It employs formerly incarcerated individuals as a way to help them re-enter society. This venture teaches its employees how to keep bees, harvest honey, make and market products, maintain operations, and package and sell honey. Its employees develop valuable skills and they learn how to lead teams.
The revenue from this venture’s sales are enough to cover its expenses. The more it sells, the more measurably profitable it becomes. The more people it employs, the greater its measurable social impact in terms of employment and mobility for those who might otherwise have difficulty finding a job. The more apiaries it operates, the larger its measurable impact on the natural ecosystem. After all, honeybees pollinate local foliage and promote local plant life. Because this venture has one operational model that generates economic, social, and ecological kinds of value, it is a social enterprise.
This social enterprise could use investment capital to support its growth, especially in its early stages. However, if it is a nonprofit organization with 501(c)(3) status, then such fundraising is not an option. Additionally, running this kind of business as a nonprofit would require a delicate dance to avoid losing its tax-exempt status with the IRS.
If this social enterprise was organized as a traditional for-profit company, then it could raise capital from investors. However, with this approach, its owners and investors could legally require its directors and officers to maximize short-term competitiveness and profits. Those profits could come at the expense of this venture’s social and environmental missions. Finally, as a traditional for-profit business, it could become an acquisition target for larger companies. Such a deal can have a negative effect on the quality of its local community presence and impact.
Social enterprises come in many diverse forms. They can be quite different from the one described in this example. But for all of them, forming a benefit corporation can be an excellent option for increasing the capacity for entrepreneurial actions. Making money and making an impact find a better harmony in benefit corporations because the mission of the business is defined concretely in its organizing documents and maintained in measurable operational ways via annual reporting.
The benefits of a robust benefit corporation ecosystem in Alabama should not be underestimated. From increased impact investment and social impact to talent attraction and retention, benefit corporations can make a lot of positive impact on our state. Entrepreneurs who are interested in forming a benefit corporation should contact an Alabama attorney.
Entrepreneurship is the primary jobs generator in any socioeconomic system. The percentage of university students and others who are building their careers with an intent to pursue entrepreneurship is higher than ever before. Among them, the emphasis on the “why” of entrepreneurship, and not just the “what,” has never been more intense. This academic year, for example, UAB launched a popular new undergraduate major in entrepreneurship. The program instills students with a strong entrepreneurial mindset and an orientation for improving communities and serving the Birmingham ecosystem. It includes a required course in “Social and Community Enterprise.”
In the years to come, we expect greater numbers of social enterprises to emerge in Alabama. They will engage problems traditionally targeted by state or nonprofit organizations, but they will do so with the adaptivity and effectiveness of high-performing entrepreneurial ventures. Alabama’s new benefit corporation law has come at the right time to support these evolutionary and revolutionary trends.
Patrick J. Murphy is Goodrich Chair of Entrepreneurship in the Collat School of Business at UAB. Jonathan Murphy is an Attorney with Fortif Law Partners, LLC in Birmingham, Alabama.
David Sher is the founder and publisher of ComebackTown. He’s past Chairman of the Birmingham Regional Chamber of Commerce (BBA), Operation New Birmingham (REV Birmingham), and the City Action Partnership (CAP).
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