By Jon MacKenzie
Not every tech entrepreneur gets into business exclusively to make a profit. While there is nothing wrong with making money, some entrepreneurs are motivated more by a social, ethical, or environmental goal. The corporation is not the right business vehicle for these people. A corporation owes a duty to its stakeholders to maximize its profits. As such, a typical corporation has no room for social or ethical goals, unless they contribute to the overall goal of making a profit.
Luckily for the social entrepreneur, the Canadian government has authorized a number of business organization types that allow and encourage social enterprises. Today we will look at the not-for-profit and charity models, while tomorrow we will look at co-operatives, “B” corporations, and for-profit social enterprises.
A not-for-profit organization is one which uses its profits to further the goals of the corporation rather than to pay dividends to its shareholders. This is distinct from a traditional corporation, who can use its profit in whichever way it likes. Not-for-profit status is often sought by organizations like schools, churches, social clubs, and volunteer groups. A not-for-profit can be incorporated or unincorporated.
An incorporated not-for-profit will have many of the benefits of a traditional corporation, including limited liability for shareholders and directors. All not-for-profits, whether incorporated or not, can apply to the CRA to be given “Non-profit” status. If granted, Non-profit status means that the organization does not pay tax on income or capital gains, save for a few limited exceptions. As such, if your tech business truly is all about changing the world and not about profit, then Non-profit status can save your business a tremendous amount of money.
Some tech entrepreneurs may seek to use their business to achieve a charitable goal, which in the eyes of the government, and specifically the CRA, is slightly different than the goals that a generic not-for-profit seeks to achieve.
A charitable organization is a not-for-profit with extra rights and responsibilities. In order to qualify as a charity, the organization must meet all of the requirements for a not-for-profit as well as the additional requirement that the objects of the corporation must be “legally” charitable. This means that the purpose of the corporation must be relief of poverty, advancement of education, advancement of religion, or other purposes beneficial to the community, as determined by the courts, but not falling in any of the previous headings.
If granted, charitable status makes your corporation exempt from income tax, like any other not-for-profit. However, the benefit that is usually most attractive for charities is the ability to issue official donation receipts to donors for income tax purposes. This allows donors to write off their donation to your charity, or to subtract that amount from their income for income tax purposes.
Charities and not-for-profits are two of the most popular vehicles for “social enterprises.” They are not the only ones. Tomorrow we will look at co-operatives, “B” corporations, and for-profit social enterprises.
Jonathan MacKenzie is a lawyer specializing in civil litigation and corporate work with a special interest in small business and entrepreneurship.
October is small business month and to celebrate, writers from Aluvion Law will be making daily posts on one of the most common forms of Small Businesses: Corporations! Corporations are particularly popular among the high-tech and IT crowd because of the tax advantages they provide to rapidly growing companies, as well as the assistance they can provide in unlocking capital. The other great benefit recognized by the ‘serial entrepreneurs’ that flock to the IT sector is that they limit the liability of the owners in the event of the business failing.