1. Adam S. Connatser, Wright Connatser PLLC Tuesday February 14, 2017
ESTABLISHING THE RIGHT LEGAL STRUCTURE FOR A SOCIAL VENTURE UWMD GROUNDFLOOR WORKSHOP
Adam S. Connatser, Wright Connatser PLLC
Tuesday February 14, 2017

2. Overview of Topics and Objectives
A social venture should factor in many, if not all, of the same considerations in choosing a legal structure that any traditional for-profit entrepreneurial venture considers. These include:

3. Formation, Tax, Liability & Governance
Traditional Entity Types Include:
Corporation (C and S)
LLC LP
Etc. (LLPs, REITS, business trusts, etc)
* Generally, for all of these, can be formed in any state even if no physical presence there, as long as you have a registered agent

4. Securities/Capital Raising
* Significant risks related to unaccredited investors and unlicensed finders * A word about convertible notes * Bottom line: exempt any early-stage offering from federal and state registration if at all possible, and avoid heavy disclosure burden because of time and cost

5. Contracts
* There’s an art in when and how you introduce an NDA * A word about LegalZoom, RocketLawyer, etc.

6. Employees
* There can be tax consequences in issuing equity and/or equity-based incentives to employees (or contractors) for services rendered. Options vs restricted stock, 409A, etc. * Get Assignment of Invention Agreements! * Limits on enforceability of non-competes

7. Intellectual Property
* How to handle trade secrets * Process patents; value of software vs hardware patents * First-to-file patent system in US now * Separate IP holding company?

8. Industry-specific laws, regulations, licenses, etc.
* If you have anything international (employees, contractors, vendors, suppliers, etc), get a lawyer and an accountant

9. … Plus more, including:
Additional available entity forms (more on these later):
Non-profit
* You’re not tax-exempt just because you’re a non-profit
* There are multiple layers of tax to potentially be exempt from
* UBTI
* There are more sections than (3) under 501(c), but donations only deductible to a few (eg., (3) and (19))
2. L3C
Benefit corp
Flexible/special purpose corp

10. Non-profit tax, or possibly intersection of non-profit and for-profit tax
* Significant structuring and governance issues to consider if you have a non-profit (or “hybrid”) owning a for-profit (or “hybrid”), a for-profit (or “hybrid”) owning a non-profit (or “hybrid”), or sister for-profit and non-profit (or “hybrid”) entities

11. Additional capital raising options:
Donations
* Not all donations are fully deductible …
2. Grants from private foundations or public charities
* Private foundations vs public charities
3. PRIs by private foundations (meet minimum 5% annual distribution requirement without being “jeopardizing investments”)
* Most often structured as loans, but don’t have to be
4. Non-grant investments by public charities, with exercise of “expenditure responsibility”

12. Additional capital raising options:
5. Social impact bonds/ pay-for-success financings 6. Direct Public Offerings (option for traditional for-profits too, but can be especially helpful to social ventures) 7. Crowdfunding (again, option for traditional for-profits too, but can be especially helpful to social ventures) * Federal registration exemption under JOBS Act, plus state registration exemptions, including in TX 8. Tranched and other structured financings involving several options above, plus other features such as guarantees, letters of credit, etc

13. “Hybrid” entity types
A. L3C 1. Basic intent is to attract private foundation investments, because state L3C statutes are designed to be consistent with PRI requirements under Federal tax code 2. Also a marketing, and recruitment and retention, bump 3. Generally, charitable purpose is primary, and production of income can’t be a “significant purpose” 4. Legislation in 10 states and 2 Native American tribes: Illinois, Kansas, Louisiana, Maine, Michigan, North Dakota, Rhode Island, Utah, Vermont, Wyoming, Oglala Sioux Tribe and Crow Indian Nation of Montana; was repealed in North Carolina 5. Fiduciary duties include keeping charitable purpose primary 6. Enforcement of fiduciary duties: non-shareholder directors might be able to sue for FD breach if they rely to their detriment

14. Benefit Corporation
(* different than B-corp, which is a certification, not an entity type) 1. Generally, must consider interests other than profit (“general public benefit”: “material positive impact on society & the environment, taken as a whole”), as judged by an independent third party, mainly B Labs 2. Legislation in 31 states and DC 3. Fiduciary duty to consider impact on shareholders, employees, suppliers, customers, the environment, community and society (though may choose priorities) 4. Enforcement of fiduciary duties: no right of action by anyone other than shareholders, including directors 5. Annual benefit report on web site

15. Flexible/Social Purpose Corporation
1. Generally, must consider at least one “special purpose”, which is one of the charitable purposes recognized under 501(c)(3) of the Federal tax code, or promoting (or minimizing negative effects on) employees, suppliers, customers, creditors, the environment, community and society 2. Legislation in 4 states: Texas, California, Florida and Washington 3. Fiduciary duty to consider at least one such “special purpose” 4. Enforcement of fiduciary duties: no right of action by anyone other than shareholders, including directors

16. Others, including Benefit LLC in Maryland

17. Q&A, War Stories, etc.