The Hobby Lobby decision: legal formation for social enterprises made easier

Abstract

Purpose The purpose of this study is to examine the choices social enterprises in the USA have about the legal formation of their business. Recently, new legal forms have been developed in the USA to ensure social goals are legally embedded into the firm. While the development of these new alternative supports social missions, organizations should be aware of both the benefits and drawbacks, which are outlined in this paper. Additionally, we draw on the US Supreme Court’s decision in the Hobby Lobby case to illustrate how social enterprises can embed their social mission into their legal foundation using traditional legal structures, accomplishing the same purpose as the new socially oriented alternatives. Design/methodology/approach The authors provide a detailed assessment of the social-oriented legal forms of business based on precedent set in the US Supreme Court Hobby Lobby case. Findings Based on precedent in the Hobby Lobby case, the authors’ view is that traditional US legal business structures can be as effective as alternative socially oriented legal forms in the US as a method to legally prevent mission drift by legally embedding social goals into the legal structure of the firm. Practical implications By highlighting how social enterprises can use traditional US legal business forms to ensure their social mission as part of the organizational goals, the authors provide another legal avenue, and so US-based social enterprises can continue to focus on addressing social issues without worrying about mission drift from legal pressures. Social implications There is quite a lot of hype surrounding the development and adoption of socially oriented legal business forms in the USA with little discussion about the actual need for these new forms. The alternative perspective by the authors informs social enterprises how they can operate within the traditional US legal system while still focusing on their social mission. Originality/value The authors are one of the first to argue, based on precedent in the Hobby Lobby case, that US social enterprises need to critically examine which type of legal form is right for their business and what will offer them most benefit to their social mission in the long run.

Business Formation for Christian Entrepreneurs

“…However, while it is helpful, it is hard to label this a significant advantage. It is simply not necessary to establish a legally binding relationship with a church to clarify a for-profit's religious values (Reinsch, Jones, & Skalberg, 2017). It also creates a layer of complication, which is one of the many potential disadvantages of this business form.…”

“…One of the major disadvantages of the public benefit corporation is added administrative complexity and cost. The process of setting up and maintaining a public benefit corporation is more complex than with a traditional corporation, and there are currently no tax benefits to offset this expense (Reinsch et al, 2017). Benefit corporations must hold themselves accountable to their founding principles.…”

“…Depending on the state of incorporation, the organization may be required to measure itself against a third-party standard or seek third-party certification (Reinsch et al, 2017;Chen, n.d.-c). These requirements vary from state to state.…”

“…As it is required to pursue both profitability and social benefits, this could create some dilemmas. In some states, the organization is required to have at least one independent director who is focused on the public benefit the organization is trying to produce (Reinsch et al, 2017).…”

“…How exactly these lawsuits would be settled is currently unknown, as the case law has not yet fully developed. This represents an unknown legal risk for public benefit corporations (Reinsch et al, 2017).…”