November 2014

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Impact Starter Presents:

“Getting the Legal Dimensions of Social Entrepreneurship Right” Online Legal Chat with Lenz & Staehelin

Rationale

Think of choosing the appropriate legal form for your social business as deciding

to build a house.

Its size and style should match your current needs as well as your future life and family prospects. More specifically to your case, this means that you need to reasonably determine how much you expect your business will grow in the short and mid-term, with regards to revenue and headcount.

There are a variety of legal forms which may be more or less suitable to your organization depending on the kind of operational activity you intend to have, the amount of money you will generate and manage as well as the number of people

partnering up or working with you. Not only the cost (constitution and maintenance) but also the decision-making process may vary greatly from one legal form to another. Business recognition, liability issues, and tax exemption possibilities could also affect your decision.

15 Second Summary

At 2:00 pm on November 27, 2014, Impact Starter hosted its first online legal chat with Lenz & Staehelin, discussing the choice of appropriate legal structure for social entrepreneurs.

We are excited to have received over 35 legal questions beforehand and to have had around 20 participants from Switzerland, the United States, and other locations including the Democratic Republic of Congo.

Social entrepreneurs

are better off using

structures that are

known to the business

world.

- David Ledermann, Partner and

Head of Insolvency and

Restructuring, Lenz & Staehelin

“

”

© 2014 Impact Pledge Foundation Page 2 of 5

Choosing the Appropriate Legal Structure for My Social Business

Spotlight: What is an Impact Starter Online Chat?

One of Impact Starter’s key features includes the opportunity for social entrepreneurs to engage in online chats with

experts in fields relevant to starting a social business, in order to help them along the way by answering related questions

that they may have. These chats provide entrepreneurs with individualized assistance from experts in order to aid them

in overcoming specific challenges that are hindering them from implementing a greater level of social entrepreneurial

activity.

(2) Impact Starter does no

David Ledermann

David Ledermann is a Partner in the Lenz & Staehelin Geneva Office. He is an expert on corporate law, mergers & acquisitions and financing transactions.

Cyril Gradis

Cyril Gradis is an Associate in the Lenz & Staehelin Geneva Office. He advises companies and charitable organizations on corporate and commercial law matters.

MEET OUR EXPERTS There is no one-size-fits-all legal form to run a social enterprise. The legal form should be decided taking numerous factors into consideration: size and potential of your business, number of people involved, presence of external investors, type of financial resources, probability of receiving tax exemption, level of risk you are ready to take; etc.

While the process of transforming your business organisation from one legal form to another is fairly straightforward, it is better to start off on the right foot. With a legal form that is not adapted, you could face serious trouble such as losing control over the destiny of your business, paying too much tax or exposing yourself to important liability claims.

There are basically three main options:

1. Acting on your own or with partners without incorporating;

2. Setting up a foundation or an association to run non-commercial activities or;

3. Doing business under a commercial legal form.

Choosing between the three will depend on your ambition to grow the business and whether you envisage your venture as primarily commercial or charitable. In the context of this legal chat, we assumed that the participants intend to run a business with a social or environmental component to it (multiple bottom-lines).

Expert Feedback

There have been many discussions around the possibility of creating a hybrid legal form (which would be a combination between a non-profit and a corporate legal form) specific for social enterprises.

Yet our experience has taught us that, from a legal perspective, social entrepreneurs should bring the same level of sophistication to the table as any other for-profit businessperson. If you want to run a business as your main purpose and include a social or ecological component to it, it is most advisable to look at genuine commercial legal forms such as the corporation (SA – AG) or the LLC (Sàrl – GmbH).

Unless there is a compelling reason, we strongly discourage social entrepreneurs from running their business in the form of an association. Also, we do not think that one should envisage a tax exemption before the business has been running for a couple of years. It is unusual that a start-up business would be profitable from the get-go, so obtaining a tax exempt status from the beginning is not a necessity.

An interesting structure for you to consider is to create a non-profit foundation after a couple of years. This foundation could then hold the shares of your corporation or LLC, once your business has become profitable.

© 2014 Impact Pledge Foundation Page 3 of 5

Three Interesting Questions Answered

How can one protect a website, brochures or other documents? Copyright protection applies to expressions, not to ideas or concepts. Works protected cover any original creation and include namely texts, photographs, computer programs and websites. They are protected because they were created without registration or formalities.

What financing models would you use for social enterprises?

For social entrepreneurs we use the same tools used in PE investments, except we adjusted them to suit the requirements of investors and founders with an interest not limited to profit maximizing. For-profit tools work very well for social entrepreneurs and the advantage is that potential investors are familiar with them.

Does the granting of tax exempt status vary according to the legal form of the business?

Tax exemptions are open to any organization pursuing a public-interest purpose regardless of their legal form. In practice, however, tax exemptions are rarely granted to organizations other than associations or foundations. Also, public interest corporations will only be granted a tax exemption if their articles of association exclude the possibility of paying dividends to shareholders.

Key Take-Away’s

Didn’t manage to take part in the chat? Not to worry, here are three key take-away’s to remember:

While your business idea may be as innovative as can be, it is very important that your legal structure fits standard business practice and reinforces the credibility of your whole project.

If you wish to keep your business small and are fine with having more exposure to liability risk, it is fine to start off as a simple partnership, and then incorporate once your business has reached a critical size.

Regarding tax exemption, we encourage you to choose a two-layered structure with a tax-exempted Swiss foundation holding the shares of the company, rather than applying for a tax exemption of the operating company itself.

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Disclaimer

The material and information (“Content”) in this document (“Online Chat Review” or “Document”) has been prepared by the Impact Pledge Foundation and Lenz & Staehelin (“IPF and Lenz & Staehelin“ or “we”) as general information only. The Content is not intended to be, and does not constitute any advice and, as such, you may not act or rely on the Content without seeking further professional advice. By using this Document, you acknowledge and you agree to all the terms and conditions in this Disclaimer. Any recommendations, opinions or findings stated in this Online Chat Review are based on circumstances and facts, as they existed to the extent of our knowledge at the time we created it. Any changes in such circumstances and facts upon which this Document is based may adversely affect any opinions or findings contained here. No Content provided in this Document regarding services or product shall constitute or be construed as an offer or as a solicitation of an offer to sell in any jurisdiction where such offer or solicitation is prohibited by law or in which the person making an offer or solicitation is not licensed or registered to do so or to any person to whom such offer or solicitation is contradictory to local law or regulation. Any such prohibited offer or solicitation is void and we will disregard any communication received in respect thereof. We make no representation or warranty, explicit or implied, as to the completeness, fairness, accuracy, correctness or quality of the Content contained herein and do not assume any liability for the assumptions made, opinions stated or the likelihood of the achievement of projections, prospect or returns. Furthermore, parts of the Document or the complete publication might be extended or changed by us without separate announcement. In no event shall IPF be liable for any direct, indirect, punitive, incidental, special or consequential damages arising out of or in any way connected with the use of this Document or for any information (including any kind of information, which is incomplete or incorrect), products and/or services obtained herein, whether based on contract, tort, strict liability or otherwise. Because some jurisdictions do not allow the exclusion or limitation of liability for consequential or incidental damages, the above limitation may not apply to you. You agree to indemnify IPF and Lenz & Staehelin against any and all liabilities, expenses (including attorneys’ fees) and damages arising out of claims resulting from your use of this Document.

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