In addition to the three commonly adopted forms of business organization—sole proprietorship, partnership, and regular corporations—some business owners select other forms of organization to meet their particular needs. We’ll look at several of these options:
- Limited liability companies
- Not-for-profit corporations
- Social Entrepreneurship
Limited Liability Companies
How would you like a legal form of organization that provides the attractive features of the three common forms of organization (corporation, sole proprietorship and partnership) and avoids the unattractive features of these three organization forms? The limited liability company (LLC) accomplishes exactly that. This form provides business owners with limited liability (a key advantage of corporations) and no “double taxation” (a key advantage of sole proprietorships and partnerships). Let’s look at the LLC in more detail.
In 1977, Wyoming became the first state to allow businesses to operate as limited liability companies. Twenty years later, in 1997, Hawaii became the last state to give its approval to the new organization form. Since then, the limited liability company has increased in popularity. Its rapid growth was fueled in part by changes in state statutes that permit a limited liability company to have just one member. The trend to LLCs can be witnessed by reading company names on the side of trucks or on storefronts in your city. It is common to see names such as Jim Evans Tree Care, LLC, and For-Cats-Only Veterinary Clinic, LLC. But LLCs are not limited to small businesses. Companies such as Crayola, Domino’s Pizza, Ritz-Carlton Hotel Company, and iSold It (which helps people sell their unwanted belongings on eBay) are operating under the limited liability form of organization. In a limited liability company, owners (called members rather than shareholders) are not personally liable for debts of the company, and its earnings are taxed only once, at the personal level (thereby eliminating double taxation).
We have touted the benefits of limited liability protection for an LLC. We now need to point out some circumstances under which an LLC member (or a shareholder in a corporation) might be held personally liable for the debts of his or her company. A business owner can be held personally liable if they:
- Personally guarantees a business debt or bank loan which the company fails to pay.
- Fails to pay employment taxes to the government.
- Engages in fraudulent or illegal behavior that harms the company or someone else.
- Does not treat the company as a separate legal entity, for example, uses company assets for personal uses.
A cooperative (also known as a co-op) is a business owned and controlled by those who use its services. Individuals and firms who belong to the cooperative join together to market products, purchase supplies, and provide services for its members. If run correctly, cooperatives increase profits for its producer-members and lower costs for its consumer-members. Cooperatives are fairly common in the agricultural community. For example, some 750 cranberry and grapefruit member growers market their cranberry sauce, fruit juices, and dried cranberries through the Ocean Spray Cooperative. More than three hundred thousand farmers obtain products they need for production—feed, seed, fertilizer, farm supplies, fuel—through the Southern States Cooperative. Co-ops also exist outside agriculture. For example, MEC (Mountain Equipment Co-op), which sells quality outdoor gear, has more than 5 million members across the country, who have each paid $5 for their lifetime memberships. The company shares its financial success with its members and also gives back 1% of its sales to maintain participation in the outdoors.
A not-for-profit corporation (sometimes called a nonprofit) is an organization formed to serve some public purpose rather than for financial gain. As long as the organization’s activity is for charitable, religious, educational, scientific, or literary purposes, it can be exempt from paying income taxes. Additionally, individuals and other organizations that contribute to the not-for-profit corporation can take a tax deduction for those contributions. The types of groups that normally apply for nonprofit status vary widely and include churches, synagogues, mosques, and other places of worship; museums; universities; and conservation groups.
Since Statistics Canada ended its deep collection of nonprofit statistics in 2008, the most recent data available is:
- 170,000 charitable and non-profit organizations in Canada
- 85,000 of these are registered charities (recognized by the Canada Revenue Agency).
- The charitable and nonprofit sector contributes an average of 8.1% of total Canadian GDP, more than the retail trade industry and close to the value of the mining, oil, and gas extraction industry
- Two million Canadians are employed in the charitable and nonprofit sector
- Over 13 million people volunteer for charities and nonprofits
Do you think these numbers have increased or decreased over the last decade? Why?
While there is no universally accepted definition of social entrepreneur, the term is typically applied to an individual who uses market-based ideas and practices to create “social value,” the enhanced well-being of individuals, communities, and the environment. Unlike ordinary business entrepreneurs who base their decisions solely on financial returns, social entrepreneurs incorporate the objective of creating social value into their founding business models. Social entrepreneurship has become exceedingly popular in recent years and a number of prestigious business schools have created specific academic programs in the field. It is often said that social entrepreneurs are changing the world. They are lauded for their ability to effect far-reaching social change through innovative solutions that disrupt existing patterns of production, distribution, and consumption. Prominent social entrepreneurs are celebrated on magazine covers, praised at the World Economic Forum in Davos, and awarded millions of dollars in seed money from “angel” investors, and applauded as “harbingers of new ways of doing business.” Social entrepreneurs are thus often hailed as heroes—but are they actually affecting positive social change?
Undeniably, social entrepreneurship can arouse a striking level of enthusiasm among consumers. Blake Mycoskie, social entrepreneur and founder of TOMS Shoes, tells the story of a young woman who accosted him in an airport, pointing at her pair of TOMS while yelling, “This is the most amazing company in the world!” Founded in 2006, TOMS Shoes immediately attracted a devoted following with its innovative use of the so-called One for One business model, in which each purchase of a pair of shoes by a consumer triggers the gift of a free pair of shoes to an impoverished child in a developing country.
The enthusiasm associated with social entrepreneurship is perhaps emblematic of increased global social awareness, which is evidenced by increased charitable giving worldwide. A 2020 global study showed that 94% of consumers said it is important that the companies they engage with have a strong purpose, and 83% said companies should only earn a profit if they also deliver a positive impact. It also showed that if a brand demonstrates a strong purpose, consumers were: 4.0 times more likely to purchase from the brand; 6.0 times more likely to protect that brand in a challenging moment; 4.5 times more likely to recommend the brand to friends and family; 4.1 times more likely to trust the brand.
Section on Social Entrepreneurship is reproduced from Chapter 5 in Good Corporation, Bad Corporation: Corporate Social Responsibility in the Global Economy by Guillermo C. Jimenez and Elizabeth Pulos licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 4.0 International License.
1aMEC Ottawa. [public domain image]. https://commons.wikimedia.org/wiki/File:MEC_Ottawa.jpg
2aKate Ter Haar. (2011). Toms [image]. Flickr. CC BY. https://www.flickr.com/photos/8489692@N03/5765485338
- Ocean Spray Cooperative. (2016). Our History. OceanSpray.com. Retrieved from: http://www.oceanspray.com/Who-We-Are/Heritage/Our-History.aspx ↵
- Southern States Cooperative. (2016). Southern States Heritage. SouthernStates.com. Retrieved from: https://www.southernstates.com/sscinfo/our-heritage/index.aspx ↵
- Murphy, R & Sachs, D. (2013, May 2). The Fireflies Next Time: The Rise of Social Entrepreneurship and the Future for Global Capitalism. Skoll World Forum in partnership with Forbes. http://skollworldforum.org/2013/05/02/the-fireflies-next-time/. ↵
- Mycoskie B. (2011, March 15). SXSW 2011 Keynote: Blake Mycoskie Gives Tip #1 for Business. YouTube [Video File, 3:39] SX TX State. http://www.youtube.com/watch?v=Xlp1Pa1WKgM. ↵
- Aziz, A. (2020, June 17). Global Study Reveals Consumers Are Four To Six Times More Likely To Purchase, Protect, and Champion Purpose-Driven Companies. Forbes. https://www.forbes.com/sites/afdhelaziz/2020/06/17/global-study-reveals-consumers-are-four-to-six-times-more-likely-to-purchase-protect-and-champion-purpose-driven-companies/?sh=2fbdcf16435f ↵