B.C. business laws
B.C. social entrepreneurs such as Shaugn Schwartz will have to choose whether to take a more corporate path.
A new business law in B.C. – which creates a CIC, or "community interest company" – could bring big investments to social enterprise.
The B.C. government is working on a new business category for ventures that straddle the line between capitalism and social service. There’s already a vibrant mix of these so-called social enterprises in B.C., and proponents hope the new rules will bring in a powerful resource the sector is currently lacking: private investors.
The new structure is called a community interest company, or CIC (pronounced “kick”), and it is identical to a for-profit corporation except that it locks the company’s assets: all profits must be kept within the CIC or spent on other community benefits, and investor returns are capped. What’s more, a CIC may never revert to a for-profit company. The B.C. Ministry of Finance wrapped up public consultations about the new model in December, although the Business Corporations Act has yet to be amended to include the change.
The challenge now is for B.C.’s many existing social enterprises to decide if this is the model for them. Take Cleaning Solution Society, for example. This Vancouver-based commercial cleaning non-profit was founded in 2004 by the Canadian Mental Health Association to provide flexible employment to people with mental disabilities. In the last two years alone, it has grown from 14 employees to 36 and from $180,000 in revenue to almost $600,000, according to manager Shaugn Schwartz.
But despite having such a compelling story to tell, Cleaning Solution can’t solicit private investors because that kind of thing isn’t covered by the rules for non-profits. So with a corporate-style option in the works, there’s a big decision to be made: Is making the switch worth it?
There are some good reasons why it might be, according to Stacey Corriveau, director of the BC Centre for Social Enterprise. For one thing, it can resolve a tricky dilemma about what non-profits are legally allowed to do. Everyone knows non-profits aren’t allowed to make a profit, Corriveau explains, but few realize that the Canada Revenue Agency’s definition of “profit” includes any profit making, not – as most people would define it – the balance of revenues and expenditures at the end of the year. That means most non-profits are legally offside with the taxman, Corriveau says, although they often don’t realize it and there isn’t much enforcement. Converting to a CIC may be a smart way out of that predicament, she says.
The other big draw, of course, is attracting investment. Charities can offer valuable tax receipts to their donors, and corporations can reward loyal investors with dividends. Non-profits have no such perks to offer the backers who give them grants. By converting to a CIC, these organizations could also sell shares and pay dividends, potentially attracting a whole new class of supporters. “Everyone seems to be competing for a diminishing pot of grant money,” Corriveau says. “Couple that with the fact that social and environmental needs are only growing, and I think it’s huge.”
But according to senior venture capitalist Jim Fletcher – a founding partner of Ventures West Capital Ltd., co-founder of BC Social Venture Partners and now managing director of Chrysalix Energy Venture Capital – CICs aren’t likely to open any investor floodgates. And besides, he adds, there’s currently nothing stopping a social enterprise from converting to a standard for-profit and getting investment that way.
But the fact that becoming a CIC is a permanent decision has some advantages, Fletcher says. For example, a social-housing project worth tens of millions of dollars could benefit from being a CIC because it guarantees investors that the project can’t be sold off 30 years later to make someone rich. Investors could also expect a modest return on their investment on such a project over the long term. That return is capped, but Fletcher says it would still be attractive to those looking for a mix of philanthropy and investment. And that appetite is growing, as Fletcher has seen first-hand in the clean-tech sector: “They have a huge recruiting advantage over the next iPhone game because there’s tons of young people out there who just want to make a difference.”
After vetting the pros and cons, Schwartz is still not sure whether the CIC route is the right one for Cleaning Solution. Why go through the hassle of changing the corporate structure of a business that’s already successful? The true promise of CICs will likely be seen when they’re used to build brand-new social enterprises, Schwartz says, and they might just give the sector the investment boost it needs.
“The way it’s set up, the sector is growing tremendously slowly,” he says. “The CICs, the concept, enables a good idea to grow fast, and that’s what we need to deal with today’s social problem.” In three to five years, Schwartz guesses, we’ll all notice the difference.