In this blogpost, Vikram Chaudhuri, Student of Department of Law, Calcutta University and the Diploma in Entrepreneurship Administration and Business Laws by NUJS, writes about, what is hybrid structure and the advantages and disadvantages of having a hybrid organization .
The most important thing to do before launching an enterprise is to choose its legal structure. On the basis of the structuring, it will depend how the enterprise gets its funding, and how the enterprise will govern, and how the profits will be divided. The amount of tax an enterprise has to pay will depend on how the enterprise has been structured.
Countries like US and UK have different options for structuring a social enterprise. They can structure their company in a L3C (Low-Profit Limited Liability Company) and Benefit Corporations ( B Corps )
India, only has a few options for social enterprises. Entrepreneurs can structure their enterprises in the following formats:-
Non – Profit Organization
NonProfit Organizations can be structured as Societies, Trusts (Public or Private) or as a Sec 8 Company under the Companies Act. Any organization working for the relief of the poor, education, medical relief, Preservation of Environment including Wildlife and Forests, any other organization for Public Utility will enjoy tax benefits under the Income Tax Act, 1961. Another advantage is that they can accept Donations under the Foreign Contribution (Regulation) Act.
The ways in which a Non- Profit Organization can earn revenues are by generating revenues from their work, by interest or dividend from its investments. The most important method for earning revenues for them is donation and grants from the Government. Their main objective is to help the society and not earn profits from their ventures. Teach for India and Digital Green are two examples of Non – Profit Organization.
For Profit Organization
A social enterprise can also be set up as a For- Profit Organization. For Profit- Organizations can be structured as the following four: sole proprietorship, partnership, limited liability partnerships, company.
Most enterprises in India are established as For Profit Organizations. The major advantage of a For Profit Organization is that it is suited for social enterprises looking for fast growth and profit. It’s easier for a For Profit organization to scale up their operations. These organizations can issue shares and go public. They can attract funding from Venture Capitals (VC’s), and as they are working for profit, they can easily invest in their own infrastructure and hire talented people.
One of the disadvantages is that the main aim of the social organization may drift apart if it is for profit. Making profit may become the ultimate motive of the organization and they may not work for the benefit of the society anymore.
Hybrid organizations are those which combine the social logic of a non-profit with the commercial logic of a for-profit business. These organizations start off as a non-profit or profit organization, and then they launch another entity.
As funds start to dry up, non- profits need to rethink as to how to generate revenue to keep the organization in working condition. Generally, they take the option of setting up another for-profit entity. Let us take one example. Consider two organizations with the same purpose: of solving the problem of poor eyesight in developing countries. The first, the Centre for Vision in the Developing World follows a traditional non-profit model, which runs on donations that fund the creation and distribution of specially designed eyeglasses that can be calibrated by the user to circumvent the need for an optometrist. The second, Vision Spring follows a different approach , working to build a network of entrepreneurs who sell eyeglasses in their communities. But they sustain themselves by selling glasses. VisionSpring is what organization scholars call a “hybrid” social venture, since it combines the social welfare logic of a non-profit and the commercial logic of a for-profit business.
Advantages of Using a Hybrid Model
When hybrids work, they can be a fantastically creative means of solving real-world problems in totally self-sustaining ways, harnessing the strengths of both for-profit and non-profit models. Hybrid structuring brings together the best of both worlds. It can attract both grants and donations and is still eligible for VC’s. To put it simply, hybrid structures are a combination of a For-Profit and non- profit entity, where both the entities function together as a joint unit. The For-Profit entity can be a subsidiary of the non-profit entity and vice versa. They can also be two separate legal entities but working for the same cause. A hybrid model helps in scaling up easily. Hybrid models are coming up in all spheres including healthcare, technology, agriculture. NGO’s and businesses are collaborating with each other in new inventive ways.
Let us take one more example. The non- profit Mozilla Foundation which promotes an open internet, in 2005, opened its for profit-subsidiary , Mozilla Corp to manage operations related to Firefox, the Web Browser created by Mozilla Foundation, and it’s other open – source software.
Disadvantages of Using a Hybrid Model
The most important thing to remember is that there is no fixed guideline on how a hybrid organization should operate. The hybrid organizations are immensely complicated organizations and each hybrid organization is set up for a particular objective. The success of a hybrid organization often depends on how well the non-profit entity and the For-Profit entity are working together. Several complexities can arise as for how these hybrid organization will be governed, to whom the Intellectual Property will belong , and sometimes there might be a conflict of interest between the for- profit entity and the non-profit entity.
The funding for the two entities also remains a problematic issue. For instance under the IT Act, a charitable trust cannot invest money in the shares of a company. There is no fixed chain of command, and nor is there any guideline on how these conflicts will be solved. So it will depend on the hybrid organization to solve its problem internally. While establishing the hybrid organization, it must be seen that the objectives and purposes of each entity are identified, in a well-drafted document, including any structural and governance problem. This will help in solving the conflicts between the two entities in a relatively easier way.
Another problem is that the entrepreneurs do not want to invest in a hybrid structure because hybrid social ventures fall into a gray area between business and charity. They are not easily funded by venture capitalists on the one hand or philanthropic foundations on the other.
However, it must be noted that, to maintain a hybrid organization it takes a huge amount of workforce and a huge amount of money. Different legal entities have different rules and regulations. They need to follow certain guidelines of the Government. To maintain a non-profit entity (for example a Trust) and a For Profit Entity (a Company) at the same time, all the necessary compliances has to be followed for both the entities. Hence, hybrid organizations are not always ideal, and must be used only in cases where it is needed.
Hybrid organizations enjoy the bests of both- the non-profit entity and a for-profit entity. A hybrid organization has some distinct advantages as well as disadvantages over the traditional for-profit and non- profit organization. It is up to the entrepreneur as to how he wishes to structure his enterprise according to the needs of his enterprise.