MaRS has recently launched a White Paper on Legislative Innovation that is proposing that Ontario create a new legal form to hold activities that would be undertaken by what we would call a social enterprise or perhaps a social purpose business. They are using the term Community Enterprise. This is builds on Stacey Corriveau and Richard Bridge's piece on Legislative Innovation for Canada.

These are both important contributions to a conversation that continues to emerge in this country. However, before we come up with a new legal form, I think that it is worth looking at the forces at play that would make one want to put so much time into this space. I guess that there is a part of me that would love to see all of this energy actually put into creating social enterprises. Perhaps this is an enabling condition. I guess that this is the question.

Arguments include:

1. Access to capital - Well, given that I have been attempting to raise $6m in under 6 months to buy a building as a nonprofit organization, I have a lot of opinions about this topic - but they would take a series of blog posts and I am only doing that once I have the money in hand :). I will say that money follows good ideas no matter what their legal form. Would it be nice to have access to more money? Of course. I would like to see tax credits for social enterprise, a PRI that would actually make sense and work in this country. My concern is that in the UK, it sounds as though the CIC hasn't been terribly effective in raising capital because the government failed to attach the tax incentives to the model. To me this is key. What we need is the ability to attract new dollars to the sector. Tax incentives that do this could easily be implemented in a way that supports investment in current non-profit legal forms.

My brother-in-law, an investment banker in BC and Paul Martin, former Prime Minister, have both suggested that social enterprise should have something akin to the mining exploration tax credit which actually creates a generous tax benefit for those that are investing in high risk social benefit investments. I would love to see more policy thinking and research going into this.

One of the things that I have learned in the last 8 weeks is that it is all about risk. As an entrepreneur, I don't see the risk the way that investors do, but they sure want their money back :)  I think that we have to grapple with this issue as a part of the access to capital item. If forming a new legal form will help this, that's helpful. But it's not clear that this will be the outcome.

2. Simplicity of Legal Form - there is a sense that in order to do what we need to do, especially as charities, that we need to contort ourselves into various forms and confusions in order to operate a social enterprise. The administration of managing these contortions is cumbersome. There is some truth to this. But I will also say that business does this all the time. They often have holding company after holding company. There are whole industries constructed to help us make sense of how we can structure a deal and they can be intensely complex.

One of the things that I don't feel has been adequately explored is the role that the nonprofit legal form plays in all of this. Certainly, charities have restrictions and given the tax benefit that they offer to donors, this makes sense. However, I have found the nonprofit legal form in Ontario to be flexible, to offer the marketing benefit, to be able to attract many types of grants and to enable us to deliver on our public benefit. It only costs $135 to create, you need 3 volunteer directors and you are good to go. Nonprofits can issue debt, can buy buildings, have a buit in asset lock, can issue community bonds, can own an equity issuing for-profit and are required to deliver on their social mission. I wonder if the lack of a non-profit legal form of this nature in the US and UK was made them feel the need to create CIC and LLCs? Maybe we're already sitting on the solution -- using our existing Ontario non-profit legal form as the basis for social enterprise.

Now, I will say that I am coming from a nonprofit perspective. Were we a social purpose business, I think that I would tend toward the voluntary 'B Corp' model because it is rigorous, offers me access to an exclusive club, has great brand recognition well beyond we policy geeks and means that I have the full flexibility of a regular business. I guess that it calls us back to what problem we are trying to solve.

3. Pressure from the regulator - now this is a big one. And for this issue alone, it may be worth investing our time and energy into a new legal form. However, the specifics of the strategy matter. It is increasingly clear that the Finance Department has gotten wind of social enterprise and social entrepreneurship and they are coming down on it. They don't understand what it is and they seem to be looking for ways to prevent anything that might look like profit. This calls into question the fundamental role of government.

Government has been downloading or neglecting service delivery into the nonprofit sector: services that they should have been delivering. Then they starting reducing funding without decreasing the demand for services. Then they say that we aren't accountable. They increase the pressure to fill in forms. And then, when we come up with new ways to generate revenue to cover those costs, they say we aren't allowed to intend to generate a surplus even if that surplus is simply meant as a buffer against financial uncertainty. Any non-profit (or for-profit!) organization in the world knows that it is the sign of a good and healthy organization to save a bit for a rainy day. The relationship between CRA and the nonprofit sector is bordering on the absurd when we start seeing this in the sector. (Several blog posts have been done on this and the work of ONN is key to this.)

Yesterday, the Speech from the Throne talks about removing red tape to enable charitable and community based innovation. This is a great great sign. Let's hope that one department is talking to the other department and that it gets turned into action.

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A couple of questions about the MaRS recommendations for a new CEC. Would it be a tax paying entity? Would it be able to apply for grants that are currently available to the nonprofit sector? These are critical questions that go to the core of what it means to be a non-profit now in Ontario. Or would it be ideally suited to give credibiltiy to those that would otherwise become for-profits? Who is this meant for?

My recommendation is that we take a wholistic approach to legislative innovation. It is challenging to create a new legal form without being clear about the impact that it will have on the wider sector. When we look at enabling social enterprise or community enterprise, I would like to see it not with a comparison to the UK and UK, but rather in comparison to what we already have and with a look at what we can already do. I am not against a new legal form. It could be exactly what we need. But I worry about more confusion, more delays, more red tape and less action.

My other recommendation is that we focus urgently on building social enterprise skills and opportunities. For example, we could have a national social enterprise program modeled after the Federal self-employment development initiative to pay the salaries of social entreprenuers for up to a year as they start their social venture - regardless of nonprofit or for profit. Or, we could have something like Ontario's old Environmental Youth Corp program, where young social entrepreneurs could be paid to work with nonprofits and charities to begin revenue generating businesses and to help transform the cultures of these older organizations. Approaches like these could attract new talent into our social benefit sector. And, they could start immediately, without the creation of a new legal form.

The social enterprise space is emerging and evolving. New legal forms may need be part of this, or they may not. The point is that we need to look at the big picture -- and the points of biggest leverage -- before we push ahead on specific projects. And we need to think carefully about the implications of the paths we choose.

This blog was cross-posted from Tonya Surman's blog on March 5, 2010

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