I attended an interesting panel discussion recently called “Thinking Outside the Box — New Corporate Structures, Tax Policy, and Public Policy for 21st-Century Social Enterprises”. I have a keen interest in social enterprise and teach a course at Harvard’s Kennedy School fo Government. In short, social enterprises combine the best of private initiative with public purpose — think of a business whose surpluses are principally re-invested into the organization to achieve some social objective as opposed to being driven exclusively by the need to maximize shareholder value (you can learn more about social enterprise and social entrepreneurship on my website, The Accelerator).

The panel discussion focused on some of the structural challenges facing “hybrid” organizations, i.e. social enterprises who look to achieve a balance between money and mission.

A little background. Organizations in the US are organized under a variety of IRS tax codes that essentially divide the universe into “for-profits” and “not-for-profits”. A typical charitable organization will register as a (501(c)3 - not-for-profit) which gives them certain advantages such as tax deductible contributions and tax exemption. It also delivers some disadvantages – such as being squeezed out of the ability to scale because of their lack of access to capital and capital markets.

A typical profit generating entity will typically register as traditional S-Corp, C-Corp and LLC. Corporate structures have downfalls (reporting regulations (Sarbanes-Oxley) and corporate taxes) and advantages (un-tethered access to venture capital, public markets and the effective filtering of profit motive, market-based economies).

However, social enterprises are neither seeking merely profit or social impact. Social enterprises are seeking both. So social enterprises fall into a weird “no-man’s land” part of the tax structure. As a non-profit, it is hard to scale. As a for-profit, it is a challenge when you are not maximizing shareholder value.

So what is a social entrepreneur to do? Some public policy work has been done to help solve this problem. Program Related Investing (PRI) allows Foundations to make “investments” in non-profit organizations to help them scale. The “reasonable” return they hope to receive must eventually be re-donated through charitable channels (sounds a bit fuzzy to me). Additionally, there has been some cultural shift in investing — evidenced in the trend toward socially responsible investing (SRI) and the proliferation of social indices, social investment funds etc.

But there is much the US government can do to further incent social entrepreneurs to scale-up their organizations. And now, I come back to my original story about the panel on “Thinking Outside the Box”.

During the discussion, I learned that the UK is light-years ahead of the US in addressing these issues. In 2005, the UK government introduced Community Interest Companies (CICs) a new corporate organizational structure and tax status. CICs are not charitable organizations. They are run as any for-profit business would be run — with one exception: the majority of profits and assets are meant to be used for “public benefit” as it is defined and determined by CIC regulators.

What does this mean? Perhaps nothing. A CIC is essentially a for-profit organization with a different intent. However, perhaps it means a whole lot. CIC status serves as a signpost to investors. It tells them that the company in question is focused less on making money and more on making social impact. CIC status allows CEOs to measure success based on long-term factors and impacts and frees them from managing quarter-to-quarter. It also makes them an attractive investment candidate for the exploding number of socially screened portfolios and socially responsible mutual funds (see the actual numbers).

The Social Age is about looking at all aspects of the world through the lens of social responsibility. Public officials can do as much toward changing the world, if not more, than their corporate and charitable counterparts. It is in understanding the relationship between business and government that will allow for social entrepreneurs to scale their solutions and effect lasting change.

It’s time for the US to catch up with the UK. US policy makers need to recognize the important role that social enterprises play in creating prosperity and solving social problems simultaneously. If they do, and if they put the appropriate regulatory structures in place to do so, investment will flow toward solving social problems in innovative ways. Thanks to The Kennedy School of Government’s Center for Public Leadership and the Catherine B. Reynold’s Foundation for putting together a fantastic and inspiring event.