On October 20, the BC Ministry of Finance announced it is “considering amendments to the Business Corporations Act to allow for the incorporation of a new hybrid type of company - the Community Interest Company (CIC) - which would benefit the larger community and allow limited investor returns within the context of a traditional for-profit company.”

The announcement stems from feedback received during the same group’s summer consultation on changes to the BC Society Act. The BC Government needs to be congratulated for its responsiveness to community feedback. If the consultation proves favourable, BC could become the ‘Vermont’ of Canada - the jurisdiction that is first to introduce innovation, and a model for other provinces/states to follow.

The hybrid structure would not likely be suitable for, or attractive to, mainstream business. It is intended to create social enterprise: businesses usually operated by the community-based sector with primary goals that are social (e.g. job creation for the intractable jobless), cultural (community theatres, museums), or environmental (e.g. energy audits for low-income folks).

Sometimes (not always) social enterprise generates significant profit that is then fed back in to the host non-profit/charity, allowing for more good work that is less reliant on other sources of funds, such as grants and donations.

The proposed caps on profits and dividends come from the UK model (there are already over 4,200 CICs registered in the UK). The intent is to enable social enterprises to maximize their impacts by having the majority of resources stay within the social enterprise.

The idea is to have a company structure that, instead of shareholder primacy (a mainstream corporation), gives priority to the social/cultural/environmental bottom lines of the company. This is about the creation of a legal structure that supports blended value propositions. Also, note that no current structural options will be taken away from folks -- this is just one other menu item to choose from!

If you read the Canadian context paper that I have posted here, you’ll get a sense of current structural limitations for enterprising non-profits.

Highlights:

• Non-profit organizations (NPOs) are not allowed to generate profits, regardless of whether the profit is spent by the organization on admin or community works during the same year. CRA states NPOs can only make profit “by mistake.” CRA estimates 75% of non-profits are currently offside. Technically, this means they would lose their tax exemption if audited.
• Unless a charity is operating a social enterprise using 90% volunteers, there are strict limits on the type of enterprise that can be operated. Many should be operating their enterprises within separate taxable corporations. My expectation is that most charities would choose the new corporate structure over the traditional one because dividends and interest are capped, and assets are locked in the event of dissolution. In other words, this special corporation would clearly be structured for community benefit, not for the benefit of investors/shareholders.

Many argue that there are not any problems with the current options, but this is largely due to the fact that they do not understand the limits. When I speak about legal structures for social enterprise at conferences, I can tell (by the look in their eyes) that many had no idea they were operating outside of structural limits.

My greatest fear is that the sector will report that we’re doing just fine and should continue with the current menu. In my opinion, this would be tragic.