Taxing Social Enterprise

By Mayer, Lloyd Hitoshi; Ganahl, Joseph R. | Stanford Law Review, February 2014 | Go to article overview

Taxing Social Enterprise

Mayer, Lloyd Hitoshi, Ganahl, Joseph R., Stanford Law Review

INTRODUCTION  I.   THE NEW HYBRID FOAMS   A. Low-Profit Limited Liability Companies (L3Cs)   B. Benefit Corporations   C. The Flexible Purpose Corporation   D. Other Hybrid Forms II.  TAXATION OF FOR-PROFIT AND NONPROFIT ENTITIES   A. Current Tax Treatment of For-Profits and Nonprofits   1. Taxing between the lines of for-profits and nonprofits   2. Rationales for the differing tax treatment      a. Subsidy theory      b. Tax-base theory   B. Current Tax Treatment of Hybrids   1. Benefit corporations and flexible purpose corporations   2. Low-profit limited liability companies   3. Conclusion III. SHOULD HYBRIDS RECEIVE SOME OR ALL OF THE TAX BENEFITS RECEIVED   BY CHARITIES?   A. Arguments in Favor of and Against Tax Benefits for Hybrids   1. The difficulty of defining public benefit   2. Risk shifting and its problems   3. State hybrid statutes and other forms of oversight are insufficient      to ensure public benefit   4. The risk of broken halos   B. Tax Benefits for Hybrids as Hybrids   1. Modifying the deductibility of charitable contributions   2. Eliminating automatic UBIT for hybrid S corporations   3. Other possible modifications CONCLUSION 


"Hybrid" legal forms have proliferated over the past half decade, seeking to combine the potential for profit with one or more public-benefitting goals. (1) These forms include the low-profit limited liability company (L3C), the benefit corporation, and most recently the flexible purpose corporation. The stated purpose of these entities is to marry the capital and innovation that results from the ability to generate a profit for investors with the public benefit goals that characterize most nonprofits. While academics have sharply criticized the emergence of these forms with respect to both their necessity and feasibility, (2) states continue to pass legislation permitting them and private parties have begun to take advantage of this legislation. To date, eight states currently allow the creation of L3Cs, nineteen states and the District of Columbia have authorized the creation of benefit corporations, and the most populous state, California, has authorized the creation of flexible purpose corporations. (3) The most current figures indicate that over 1000 of these new entities now exist. (4) Although this figure pales in comparison to the number of more traditional for profit and nonprofit legal entities, (5) these new forms are now an established part of the legal landscape for those seeking to combine doing good with doing well. (6) Such efforts are commonly referred to as "social enterprise" and those engaged in them as "social entrepreneurs," although neither of these terms has a fixed definition. (7)

There is no single, representative example of the type of business that chooses to use a hybrid legal form. When Delaware recently permitted the creation of benefit corporations, one of the first entities to switch to this status was Plum Organics, a fast-growing company committed to providing healthy snacks for children and wholly owned by Campbell Soup Company. (8) When California permitted the creation of benefit corporations one of the first businesses to switch to that status was Patagonia, a family-owned maker of outdoor clothing and gear that contributes at least one percent of its sales to grassroots environmental groups. (9) And one of the first L3Cs is Maine's Own Organic Milk (MOOMilk), which ten organic dairy farms formed to help promote local family farming, and which the farmers, outside investors, and two nonprofits, the Maine Farm Bureau and the Maine Organic Farmers and Gardeners Association, own. (10)

To date, supporters of these hybrid forms have focused primarily on encouraging states to permit the creation of these new entities, but there have already been calls for these forms to receive some or all of the tax benefits enjoyed by charities. (11) As was the case with the calls to create these hybrid forms in the first place, such calls for tax benefits have met much skepticism. …

The rest of this article is only available to active members of Questia

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
One moment ...
Default project is now your active project.
Project items

Items saved from this article

This article has been saved
Highlights (0)
Some of your highlights are legacy items.

Highlights saved before July 30, 2012 will not be displayed on their respective source pages.

You can easily re-create the highlights by opening the book page or article, selecting the text, and clicking “Highlight.”

Citations (0)
Some of your citations are legacy items.

Any citation created before July 30, 2012 will labeled as a “Cited page.” New citations will be saved as cited passages, pages or articles.

We also added the ability to view new citations from your projects or the book or article where you created them.

Notes (0)
Bookmarks (0)

You have no saved items from this article

Project items include:
  • Saved book/article
  • Highlights
  • Quotes/citations
  • Notes
  • Bookmarks
Cite this article

Cited article

Citations are available only to our active members.
Buy instant access to cite pages or passages in MLA, APA and Chicago citation styles.

(Einhorn, 1992, p. 25)

(Einhorn 25)

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25,

Note: primary sources have slightly different requirements for citation. Please see these guidelines for more information.

Cited article

Taxing Social Enterprise


Text size Smaller Larger Reset View mode
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

Full screen

matching results for page

    Questia reader help

    How to highlight and cite specific passages

    1. Click or tap the first word you want to select.
    2. Click or tap the last word you want to select, and you’ll see everything in between get selected.
    3. You’ll then get a menu of options like creating a highlight or a citation from that passage of text.

    OK, got it!

    Cited passage

    Citations are available only to our active members.
    Buy instant access to cite pages or passages in MLA, APA and Chicago citation styles.

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn, 1992, p. 25).

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences."1

    1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25,

    New feature

    It is estimated that 1 in 10 people have dyslexia, and in an effort to make Questia easier to use for those people, we have added a new choice of font to the Reader. That font is called OpenDyslexic, and has been designed to help with some of the symptoms of dyslexia. For more information on this font, please visit

    To use OpenDyslexic, choose it from the Typeface list in Font settings.

    OK, got it!

    Cited passage

    Thanks for trying Questia!

    Please continue trying out our research tools, but please note, full functionality is available only to our active members.

    Your work will be lost once you leave this Web page.

    Buy instant access to save your work.

    Already a member? Log in now.

    Author Advanced search


    An unknown error has occurred. Please click the button below to reload the page. If the problem persists, please try again in a little while.