Analyzing Effects and Implications of Regulating Charitable Hybrid Forms as Charitable Trusts: Round Peg and Square Hole?

52 Pages Posted: 16 Oct 2013 Last revised: 6 Mar 2014

Date Written: February 2014

Abstract

One of the principle motivating forces driving the creation, expansion, and use of new formal hybrid business structures is a desire among entrepreneurs, investors/funders, and policymakers to dedicate financial capital and other resources to areas of society that might not be as clearly or easily pursued under traditional forms. People are seeing opportunities to address social problems in new and different ways with financial resources, business models, and compensation structures and incentives not normally targeted to such problems with the same vigor, if at all. They have wanted clearer and simpler legal contexts within which to pursue their purposes and help others do likewise.

As a result, new business forms have emerged such as benefit corporations, flexible purpose corporations, and low profit limited liability companies. As with most things new, there are accompanying questions and ambiguities. Among the most notable and troubling for these forms and their use is how to regulate them and what impact such regulation may have on operations.

One approach seeks to subject them to charitable trust laws, but that approach is likely to have substantial negative (and avoidable) consequences for these forms and those who engage with them, including the following:

• restraints on how or even whether charitable hybrids distribute profits and allocate appreciated property.

• restrained flexibility to change either their purposes or operations in light of models or tactics that seem to be succeeding or failing;

• fewer avenues for merging, terminating, or disposing of assets, which could restrict or even extinguish certain exit strategies for funders; and

• restricted capacity to compensate managers and other insiders, especially if they are also investors.

Fortunately, it is not required that charitable hybrids be uniformly treated as charitable trusts, and there are sound arguments against doing so, not the least of which is that such a construction could effectively nullify the statutes, which could not have been the legislative or gubernatorial intent. More importantly, strong alternatives exist for addressing legitimate regulatory concerns, including the prevention of fundraising scams and protecting the credibility of the charitable sector and the integrity of when and how charitable trust law applies. These alternatives could actually broaden the available oversight, causes of action, remedies, and consequences for failure to abide by charitability requirements of the new forms.

Keywords: philanthropy, hybrid forms, corporate forms, business forms, benefit corporation, b corps, flexible purpose corporation, low profit limited liability company, l3c, impact investing, social responsibility, state regulation, chartiable trust, social enterprise, social entrepreneurship

JEL Classification: K20, K23, K29, L20, L21, L22, L29, L30, L31, L33,

Suggested Citation

Tyler, John E., Analyzing Effects and Implications of Regulating Charitable Hybrid Forms as Charitable Trusts: Round Peg and Square Hole? (February 2014). New York University Journal of Law and Business, Vol 9:535-586 (2013), Available at SSRN: https://ssrn.com/abstract=2325580

John E. Tyler (Contact Author)

Ewing Marion Kauffman Foundation ( email )

4801 Rockhill Road
Kansas City, MO 64110-2046
United States
816-932-1293 (Phone)

Columbia University ( email )

3022 Broadway
New York, NY 10027
United States

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