Shape-shifters: What happens when social enterprises need to change their legal structure?

APRIL 28 / Kristina Roberts

The team at IntegralOrg is in the process of developing a tool to help entrepreneurs and organizations navigate the legal landscape in Alberta as it relates to social entrepreneurship. During our research to inform the development of the tool, we have explored the challenges that can arise when selecting a legal structure for a social enterprise.  

Stakeholders we have talked to have agreed that the selection of a legal structure should be informed by vision, mission, business strategy, and other management considerations. Choosing a structure that does not support these factors can be detrimental to an organization. For this reason, it is essential for organizations and entrepreneurs to seek expert legal advice before incorporating or selecting a legal structure for a social enterprise. While we generally agree that prevention is the best medicine when it comes to legal and regulatory challenges, we also acknowledge that sometimes the path before an entrepreneur is not clearly laid out. Business models can adapt over time and unforeseen circumstances can arise.  

So, what happens if you’ve structured your social enterprise and at some point down the line you realize that the structure no longer supports what you are trying to achieve? Our research has revealed that it is not uncommon for social entrepreneurs to change course. Often times these changes in legal structure can be somewhat costly or complicated, but it is important to understand that adaptation is possible. In fact, IntegralOrg is currently working with a couple of organizations to design and implement structural changes to accommodate social enterprise activities. Some of the reasons for structural changes that we have come across include the following:

  • The initial structure was selected based on ease or efficiency but was never the optimal structure for the enterprise;
  • Challenges splitting employee time between different business units or programming areas;
  • Liability exposure or other risks to the “parent” organization from social enterprise activities;
  • Operating restrictions of a “parent” organization; and Intervention from the CRA or another regulator.

Below, we share the stories of two social enterprises that at some point changed their legal structure.

Habitat for Humanity: ReStore  

Habitat for Humanity of Southern Alberta is a charitable organization with the primary objective of working within Southern Alberta to help families build strength, stability, and independence through affordable home ownership. The organization helps families purchase homes with no down payment and no interest, and ensures that the families’ mortgage payments never exceed more than 25 percent of their total household income.  

ReStore is the social enterprise associated with Habitat for Humanity. It is a home and building supply store with over 100 locations across Canada that accepts donated and then resells quality new and used building materials at reasonable prices. ReStore has operated under the umbrella of Habitat’s charitable organization since its inception in 1991 and has been very successful in generating revenue to support Habitat’s operations and charitable activities.  

According to a case study included in Mobilizing Private Capital for Public Good: Priorities for Canada, a report from Canada’s National Advisory Board (CNAB) to the Social Impact Investment Task Force in 2014, at some point prior to 2009 CRA began assessing whether the activities associated with the ReStores constituted fundraising activities or business activities. The report noted that, “to qualify as a business, the CRA indicated that ReStores would need to be: 1) 90 percent volunteer-run (based on a head-count of paid employees and volunteers working at least 40 hours a year) and generate no more than 50 percent of Habitat affiliates’ revenue and operate using no more than 50 percent of their resources; or 2) sell only excess material from its build sites and not accept donations with the main purpose of sale at ReStores (rather than for the purpose of building affordable housing).”  

The ReStore locations associated with Habitat for Humanity of Southern Alberta were  consistently generating enough revenue to offset a large portion of the operating expenses of the charity. According to the financial statements of Habitat for Humanity Southern Alberta Society for the Year ended December 31, 2018, “The Society formed 1458573 Alberta Ltd. (“1458573”) as a wholly owned subsidiary in April 2009 to provide retail services for the gift-in-kind donations received by the Society.” 1458573 was set up as a separate, taxable for-profit business corporation in which to house ReStore.  

The CNAB report mentions that Habitat Canada expended significant amounts in legal fees and staff and board time to ensure they had a thorough understanding of the CRA’s guidance, but “ultimately, the CRA indicated that Habitat could continue to operate as it [had] been, subject to further instruction.”  

Operating ReStore inside the charity was a more viable business model than operating  inside a separate corporation, (largely due to the ability to issue tax receipts in exchange for donated goods with a retail value greater than $20). The financial statements state “...As of January 1, 2014, the social enterprise moved to the Society and is operated by the Society...On September 19, 2018, the Board of the Society approved the wind-up of 1458573 Alberta Ltd.” The transition back to operating inside the charity was not overly difficult since there were no net assets to transfer to the charity (the brick and mortar store locations were leased, not owned).   

Calgary Tool Library  

The Calgary Tool Library is a program that allows members to borrow from a collection of household tools on a regular basis in exchange for a membership fee. The program also supports and collaborates on community construction projects. The mission of the Calgary Tool Library is to provide affordable access to tools to improve Calgarians’ quality of life.  

The Calgary Tool Library was originally created by a group of community volunteers operated as a program of the Bridgeland Riverside Community Association (BRCA), an Alberta nonprofit Society. Due to COVID-19 and restrictions on public gatherings, the BRCA has been unable to re-open its facilities, which in turn has prevented the Tool Library from re-opening. As such, the Calgary Tool Library is legally parting ways with the BRCA. The current plan is to incorporate as a not-for-profit co-operative with the members who access the tools as owners.    

Hopefully the above case-studies further your understanding of some of the circumstances in which the legal restructuring of a social enterprise may be required.

If you have any questions or comments about this blog article, or if you would like guidance or assistance with deciding upon or changing your organization’s legal structure, do not hesitate to contact us at 403-910-7279 or admin@integralorg.ca.  

This spring, IntegralOrg will launch a number of supports for nonprofits and charities who are considering social enterprise, including innovative workshops, small-group seminars and an interactive online toolkit to help organizations structure their ventures appropriately. Follow us on social media, subscribe to our newsletter, and stay tuned for more information on upcoming training and tools.     

Kristina Roberts is a lawyer with experience in public interest matters and social entrepreneurship. She articled at a regional firm in Calgary specializing in municipal law and was called to the bar in Alberta in 2019.  At IntegralOrg, Kristina is responsible for developing a toolkit to assist organizations and entrepreneurs with structuring social enterprises, as well as overseeing and assisting with various other legal initiatives relevant to the charitable and nonprofit sector and the organizations that IntegralOrg works with.