Highlights is the monthly newsletter of the npEnterprise Forum, the official listserv partner of the Social Enterprise Alliance. This edition highlights a recent discussion on the issue of where to incorporate a for profit social enterprise, for a group that plans to incorporate their 501c3 nonprofit in Massachusetts.

Here are the responses we received to the following question from Chuck Holland:

"We are planning to incorporate an 501c3 in Massachusetts with plans to create a for profit social enterprise that can take investments for growth. Should we incorporate the non-profit in a specific state to get the best support for a hybrid corporation? Can we incorporate the for profit as an LLC in another state later?"

(1) From Peter Lucash
Your first challenge is going to be to be approved as a tax exempt organization. You will be paying income taxes on unrelated business income, such as the for profit company you are planning. The tax exempt parent will have to be an operating entity in order to maintain your status.

Why bother with the nonprofit if the focus, it appears, is the for profit? Incorporating in another state carries its own issues and obligations - the real question is: why? What would be accomplished by doing this?

You need an attorney to help you match your plans with the law and what makes sense from a business perspective.

(2) From Allen Bromberger
The nonprofit and for-profit do not need to be formed in the same state, although being subject to two different jurisdictions may involve some headaches. The most important thing is to form the for-profit in a state that has a "constituent statute." This allows you to put language in your governing documents authorizing the directors (or managers in the case of an LLC) to take a broad range of factors, including community impact, effect on stakeholders, and other things related to the social mission without losing the protections of the business judgment rule.

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The npEnterprise Forum discusses practical steps nonprofits can take to enhance their organizational capacity, mission impact, and financial sustainability, through the development of income-generating business activities. This list is owned and moderated by Rolfe Larson Associates. They reserve the right to select messages for distribution to the list, and to publish archived messages with proper attribution in other venues. More information about this listserv is available at http://www.npEnterprise.net, including how to subscribe and unsubscribe. The npEnterprise Forum has been designated by the Social Enterprise Alliance, a membership organization, as its official listserv. Permission to redistribute message(s) contained in this email is granted provided you include this paragraph.

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