Recent budget changes may herald new opportunities for social entrepreneurship.
The Federal Government proposed changes in Budget 2015 to allow charities to own LP units. The change was apparently intended to resolve a technical problem involving investments by charities, but it may have a useful side benefit in allowing charities to structure social business ventures as a limited partnership (an “LP”).
As we have written before, Charitable Organizations and Public Foundations are limited in the types of businesses they can engage in by the related business rules, while Private Foundations are completely forbidden from engaging in business. By definition, a partnership exists where two or more parties carry on business together with a view to making a profit. So, from a technical perspective, charities that were partners in a venture were considered to be carrying on business even if they were “silent” partners.
An LP is a legal structure where there is one general partner and a number of limited partners. The terms of the partnership are very flexible and mostly determined by contract between the parties. Usually there is a general partner who is more exposed to liability than the limited partners but also retains a higher level of control over the project. The structure is commonly used with complex investments, where there are certain individuals well-versed in the product area (such as real estate or mining) who seek investment from a number of individuals as limited and silent partners. The investors buy partnership units and are entitled to benefit from the project pro rata as profits are distributed out to the various partners. Before the amendments, charities would be restricted by the Income Tax Act from engaging in these types of ventures. But now, it seems that an exception will exist for ownership of LP units.
As social enterprise became a popular topic, concerns were raised about a lack of appropriate investment vehicles that would allow charities to participate. Indeed, there were also concerns that charities may be putting their charitable assets at risk by engaging in business ventures. It is easy to see how these amendments may now help charities engage in social enterprise (defined as a profit-making business where profit is only one of a number of motives, if at all).
Structuring a social enterprise as an LP would require a general partner (presumably not a charity) who would be prepared to accept additional risk so that the charity is faced with less. And so long as the charity’s social goals are being met, they may be prepared to provide additional funding for the project for a smaller return. The partnership model may also allow for different types of parties (i.e. for-profit, not-for -rofit, charity, or government) to participate in a social venture with differing levels of involvement, exposure and benefit.
LPs are creatures of the statutes of the various provinces. They cannot be created simply because two or more individuals get together and call themselves a LP. There are certain requirements (including registration) and typically they are outlined in a partnership agreement. Any charities or private sector enterprises interested in using this type of structure to engage in social enterprise should contact competent legal counsel. Drache Aptowitzer PC lawyers are well-suited to helping in this area.