Entity Choices for a Socially Responsible Business

8 Pages Posted: 23 Jan 2019

See all articles by Alexander Hoffarth

Alexander Hoffarth

University of Virginia - Darden School of Business

Mary Margaret Frank

University of Virginia - Darden School of Business

Samuel A. Lewis Sr.

University of Virginia - Darden School of Business

Abstract

One of the fastest-growing areas in business is socially responsible investment (SRI), which incorporates environmental, social, and governance concerns. From 2007 to 2017, SRI increased from $2.71 trillion to over $21 trillion, and in 2017, 84% of all millennials were interested in SRI. Given these trends, how should an entrepreneur with a social mission proceed? One of the first decisions is choosing an appropriate legal entity. This technical note presents an array of legal entities that a business with a social mission could consider, with special emphasis on a relatively recent option: the benefit corporation.

Excerpt

UVA-C-2407

Jan. 9, 2019

Entity Choices for a Socially Responsible Business

Introduction

Social enterprises. Hybrid social ventures. Triple bottom line corporations. All these entities make “use of market-based strategies to promote the public good,” which characterize “one of the…fastest growing areas of small business today.” Part of the growth in this area might be attributed to the fact that stakeholders are demanding that businesses identify with a social mission. While the data show a general preference by consumers and labor for companies that are pursuing a social impact, this preference is particularly striking when one focuses specifically on the so-called millennial generation. For example, “seventy percent of millennials indicate a willingness to spend more with brands that support causes or operate using business models that align and resonate with their own values.” As employees, millennials show a similar desire for their work to serve a greater purpose. Indeed, more than 50% of millennials say they would take a pay cut to find work that matches their values, and 90% want to use their skills for good. As of 2015, the millennial generation was the largest share of the workforce (at 53.5 million) and set to assume only more influence going forward. One could therefore expect these trends to continue.

Investors are showing an interest in channeling their capital to support social enterprises as well. Socially responsible investment (SRI)—investment that incorporates environmental, social, and governance (ESG) concerns—has grown tremendously in the past decade. For example, in 2007, SRI accounted for 11% ($ 2.71trillion) of assets under management; only seven years later, that value had increased to over $ 21trillion. In 2017, private equity and venture capital firms allocated $ 4billion. Most notably in 2017, well-known private equity firms TPG and Bain Capital closed the Rise Fund ($ 2billion) and the Double Impact Fund ($ 390million), respectively, to “focus on ‘double bottom line' investment.” And there is speculation that in the future, millennials will prefer to prioritize these types of investments. The limited data about existing high-net-worth millennials supports this point. According to a report by the Spectrum Group, 49% of millennials with more than $ 1million net worth said that social responsibility is a factor in choosing investments, compared to 43% of Generation X investors and 34% of baby boomers. And, according to Bloomberg, 84% of all millennials, irrespective of wealth, are interested in socially responsible investing.

. . .

Keywords: benefit corporation, social enterprise, socially responsible investment, millennials, social entrepreneur, legal entity, public benefit, pass-through entity

Suggested Citation

Hoffarth, Alexander and Frank, Mary Margaret and Lewis Sr., Samuel A., Entity Choices for a Socially Responsible Business. Darden Case No. UVA-C-2407. Available at SSRN: https://ssrn.com/abstract=3320828

Alexander Hoffarth

University of Virginia - Darden School of Business

P.O. Box 6550
Charlottesville, VA 22906-6550
United States

Mary Margaret Frank (Contact Author)

University of Virginia - Darden School of Business ( email )

P.O. Box 6550
Charlottesville, VA 22906-6550
United States
434-924-4432 (Phone)
434-243-5021 (Fax)

HOME PAGE: http://www.darden.virginia.edu/faculty/frank.htm

Samuel A. Lewis Sr.

University of Virginia - Darden School of Business

P.O. Box 6550
Charlottesville, VA 22906-6550
United States

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