Regulation and Incentives for “Social Enterprise” in the United States: But First Greater and More Substantive Differentiation

1 Introduction

Too often, what people mean and understand when they talk or write about social enterprise, social entrepreneurship, the social economy, social business, social purpose business, and other similar terms does not align. Sometimes, the same person in the same conversation will use the same words but mean different things. For instance, the nomenclature may invoke overall movements and their variations; specific legal structures; categories of businesses or operations with certain features; discrete, unique enterprises; and/or some varying, interchangeable combinations of the preceding. No one involved in the communication may realize the disconnect until sometime later.

In nearly all cases, the references often invoke undeclared degrees of attention to owners’ financial interests, pursuing and/or achieving social good, and engaging the market.

Clarity about such meanings and understandings (or the lack thereof) can be especially relevant, even essential for decision-makers at nonprofits – particularly charitable, tax-exempt nonprofits – for at least three reasons. First, they sometimes undertake their own strategic efforts to engage the marketplace to generate revenue and/or advance/scale their programmatic objectives. They may do this directly or through tandem structures involving parent-subsidiary relationships. In doing so, non-donative sources of capital may be available to them, and their leaders and managers will need to be clear among themselves about what they are doing/prioritizing and why, not to mention also being as clear with the providers of capital. The above terms, along with terms like “impact investing,” can facilitate either clarity or confusion, but too often tend towards the latter.

A second reason for clarity is that charities are often approached by enterprises purporting to be – even fully believing they are – social. Charities may be asked to facilitate supply and/or distribution chains for buy-one-give-one enterprises; to provide their name and reputation for cause marketing, “point-of-sale,” or “rounding up” campaigns; to contribute resources (e.g. financial, data, content, networks, etc.) to a joint venture, public-private partnership, or some other collaboration; to engage with an endeavor because it is a benefit corporation, certified B corporation, or L3C; and more. Ambiguity inhibits the abilities of charities’ decision-makers to understand what is being asked of them, what they need to guard against, and what they can reasonably expect from the asker.

Finally, and perhaps most broadly, charities increasingly compete with so-called social enterprises, whether for capital, employees, customers, policymaker attention, etc. (Ashley and Young 2014, 208, 210). Some of that competition may be appropriate and even constructive, but charities suffer when competition is rooted in confused people who might mistakenly think they are advancing or supporting a charitable endeavor when they are not (Andreadakis 2023, 888). In other words, charities and society suffer when people want to believe in what they are doing even if they are not doing what they believe in.

Given charitable mandates, non-distribution constraints, and prohibitions against impermissible private benefit, charities must clearly understand who they are engaging with, how, and the extent of alignment or lack thereof. Such understandings are more than mere conveniences or reputational concerns. Clarity can be existential for compliance with legal obligations. For these charities and for the sector broadly, including private foundations and other funders, it can be tempting and reasonable to want government regulatory and policy interventions to help force much-needed clarity.

The social enterprise movement and its component parts and enterprises also would benefit from such clarity. If a meaningful part of the rationale for a social enterprise movement is to attract resources to problems or opportunities that the market, government, and/or charitable endeavors neglect or cannot fully engage – a so-called “middle” space – it is not enough to vaguely invoke nebulous combinations or degrees of attention to owner financial interests, market participation, and social good. It seems that the attraction of resources would significantly depend on emphasizing – if not prioritizing – pursuit of neglected social goods.

Social enterprise, done right and well, will attract capital, talent, and attention to those problems and opportunities (Abramson and Billings 2019, 1; Anheier and Toepler 2019, 2; Bohinc and Schwartz 2021, 1, 6; Calo and Teasdale 2016, 6; Dadush 2015, 200; Giagnocavo 2023, 455; Langer 2021, 497). Anything else risks merely tolerating social good while advancing owner financial interests, which is expected in the for-profit space but is less fine in and even arguably detrimental to that “middle” space.

Even the part of the movement and its enterprises that prioritize owners’ financial interests and/or flexibility to choose what to prioritize when could also benefit from clarity if for no other reason than they would no longer need to disclaim tolerating concessionary returns. It would be clear that such returns are not within their sphere.

Regulatory and policy interventions could reduce green/purpose washing, ambiguity, and confusion, and thereby promote aligned engagement, but only if that “middle” space is sufficiently differentiated from traditional for-profits and charities and/or flexibility of purpose.

Differentiation is important – if not essential (Anheier and Toepler 2019, 5; Bohinc and Schwartz 2021, 4; Fici 2023, 157, 163; Hiez 2023b, 696; Serres and De Moor 2023, 864, 878; Sheehy and Diaz-Granados 2023, 635–36). People should be clear that social enterprises are unique from other types of operations (Aldohni 2023, 575; Bohinc and Schwartz 2021, 2; Goldstein et al. 2023, 393), which requires that distinguishing features be meaningful and worthwhile (Dadush 2015, 163, 184, 2018, 11; Liao 2018, 112) so that social enterprises present a clear alternative to existing laws and traditional approaches (Liao 2018, 119).

If “virtually any organization can call itself a social enterprise,” it will lead to “blurriness as to which business is actually a ‘social’ one” (Serres and De Moor 2023, 862; see Sheehy and Diaz-Granados 2023, 639), which arguably describes the current state in the U.S. Thus, differentiation should determine who is in and who is out, what is and is not subject to applicable regulatory oversight, and who can be advantaged by incentives and who cannot (Sheehy and Diaz-Granados 2023, 638). Those who are advantaged through policy should be structured and/or operated differently from those who are disadvantaged. They should contribute differentiable social goods that the latter do not, cannot, and/or choose not to do. Otherwise, society risks making concessions without getting an equivalent positive return for doing so and might even be harming itself by instituting unwarranted disadvantages. (See Abramson and Billings 2019, 7 (citation omitted)).

Among ways to ascertain differentiation of the “middle” space is through legal structures that achieve the requisite ordering of purposes. Another is whether the features and characteristics of an enterprise demonstrate the requisite ordering of priorities, regardless of legal structure – what Hiez refers to as a “modality” approach (Hiez 2023a, 449–50, 2023b, 701). Whether through legal structure or modalities, it seems that all should exhibit something like the following differentiating characteristics relative to traditional and pretend approaches:

1. heightened commitment to social good,

2. greater intentionality about predictably and reliably connecting their behaviors to socially good outcomes, and

3. consistency through time and persistence through circumstance.

This framework can help with understanding the current landscape of regulatory and policy efforts to differentiate and whether the status quo in the U.S. actually does so to any meaningful degree. What, if anything, distinguishes traditional approaches to for-profits and charities from the “middle” space? Is there a truly “middle” space in practice? If so, do regulations and policies need to catch up to reinforce and advance it? If not, how might existing regulatory and policy environments be applied to protect against fraud and misrepresentation? To guard against securities manipulation and misunderstandings? To ensure that consumers and employees have enough of the right information for their decision-making and otherwise? Also, if there currently is not sufficient differentiation and if a “middle” space is desired, then this understanding of the status quo can facilitate developing new and different regulatory and policy approaches.

In short, there is not a current governmental – or even private – regulatory environment in the U.S. that clearly facilitates operating in, for, or through that “middle” space of social enterprise; instead, the environment has been characterized as deficient, even potentially harmful (Abramson and Billings 2019, 1; Anheier and Toepler 2019, 2; Bohinc and Schwartz 2021, 19; Brakman Reiser 2014, 240; Dadush 2015, 146, 184; Ebrahim et al. 2014, 86–87; Tyler 2018b, 2020; Tyler et al. 2015, 2018).

Ultimately, this essay submits that the U.S. lacks coherence, predictability, differentiation, critical mass, and a general will to enforce a reliable ordering of priorities that persists over time and can weather changes in ownership priorities and personnel. To begin with, we lack a coherent, limiting definition of “social enterprise” (Abramson and Billings 2019, 6). We also lack the distinguishing features of a social enterprise sector sufficient to enable a distinctive regulatory environment such as has emerged elsewhere: explicitly declared priority of purpose, delimiting scopes (e.g. hard-to-employ workers (“WISE”)), distribution caps or reinvestment mandates, asset locks, stakeholder participation, one-member-one-vote, discretely charged and empowered regulatory agencies, among other possibilities.

Even so, there are organizations whose operations are different. Unfortunately, there also are organizations, industries, and movements that only purport to be different, but they may not be different enough to justify treatment other than as for-profit companies. Until there is differentiation at scale, this essay builds on prior work to suggest that clarity through government regulation in the present will need to be through means applicable to for-profit businesses (e.g. securities, consumer protection, fiduciary duties, fraud and misrepresentation, contract, etc.). While such means may not incentivize enterprises to operate in the “middle” space, these tools and other analyses in this essay can help identify green/purpose washing (whether done fraudulently, intentionally, carelessly, or accidentally), promote clearer communication of purposes and priorities, and facilitate alignment of interests and accountabilities. Such efforts also can help clarify the starting point for the journey of future regulations, incentives, and greater practical adoption – in the U.S. especially.

Clear, unambiguous differentiation could facilitate alignment among and between investors, entrepreneurs, employees, consumers, creditors, and researchers, in addition to providing clarity for charitable nonprofits and their boards, leaders, managers, personnel, and funders. Of course, the need for and benefits of differentiation should not be confused with the will to make it happen.

This essay begins in part 2.0 by understanding what might be regulated and incentivized based on words and concepts commonly used in reference to social business – impact, intentions, and outcomes – before concluding that clarity would be advanced if accountability and nomenclature were instead to process and priorities of purpose. Part 3.0 more deeply considers a proposed framework for differentiation: commitment to social good, intentionally connecting behaviors to social good outcomes, and ensuring persistence through and consistency across time and circumstances. Finally, part 4.0 compares ways in which thirty-nine non-U.S. jurisdictions have invoked those concepts through formal legal structures and/or modalities with no or limited regard to legal structure, ultimately concluding that the structures and modalities in the U.S. do not support finding a cohesive “middle” space to support new, different regulation or incentives … yet.

2 Regulation, Incentives, and Accountability for What: Impact? Intentions? Outcomes? Process?

Efforts to regulate or incentivize begin with clearly understanding what is to be regulated or incentivized. Unfortunately for this task, ambiguous terminology pervades the social entrepreneurship space in the U.S. (Tyler forthcoming 2025, Appendix A presents and categorizes 166 definitions.) This is not to suggest bad faith or nefarious efforts; quite the contrary. Word selection in this space is usually well-meaning, hopeful, and full of aspirational goodwill. Unfortunately, it still too often lacks clarity about underlying possible meanings and/or applications in practice, which makes regulation and practical implementation challenging and unappealing.

At even the highest level, among frequent assertions are that social enterprises can or should variably be held to account for intentions; impact, outcomes, or results; effort; and otherwise. For instance, there are references to the “promise” of social enterprise (Dadush 2015, 143, 2018, 2). While fine as an expression of aspiration and hope, the word is not helpful for the practice of regulation or accountability. “Promise” is even less helpful in conversations between investors and entrepreneurs or as a way for leaders and decision-makers in charitable nonprofits to be clear about their priorities and to have standards against which to assess those of others. None may know what others in the conversation mean by the noun “promise,” how or even whether to engage them, or how they will assess success or failure, much less progress.

Similar problems arise with the term “impact” (Abramson and Billings 2019, 5; Tyler 2018a, 46–47). On its face, the term suggests a focus on outcomes, results, or effects, but when used in social enterprise, it frequently gets re-configured to mean “intending” both financial returns and social good. That intent can vary from one person or situation to the next, between investor and entrepreneur, within groups of investors or entrepreneurs, and/or among charitable nonprofit leaders and those with whom they might collaborate. All are within the ambit of “impact” if even some minuscule level of intending both distributable profits and social good are present. Being only one percent committed to either purpose qualifies for inclusion.

Contrary to the nearly all-embracing term, investors and entrepreneurs are not homogenous (Dadush 2018, 441; 2015, 154–55, 163), and they can fit anywhere within a wide-ranging calibration of permissible intentions. Their varying and unstated degrees of relative importance and intensity can be problematic and even harmful (Shepherd et al. 2019) as they engage with each other in ways that mistakenly suggest alignment that does not exist despite a well-intentioned embrace of taxonomies and terminology that suggests otherwise.

As a practical matter, then, the “impact” terminology does not effectively differentiate capital sourcing in social enterprise from traditional investing. After all, the investor 100 % focused on the owners’ financial interests and not willing to even tolerate or wanting to affirmatively prevent any social good whatsoever would be rare (if not non-existent); all are willing to tolerate at least 1 % social good and, thus, would qualify as “impact” investors. That lack of distinction undermines the ability to effectively regulate differently, not to mention the practical problems with people trying to put deals together or ascertain accountability, progress, or success or failure within them. Of course, there may be ratios that clearly qualify as differentiated social good, but current all-embracing terminology is not that clear, nor does there seem to be a meaningful willingness to pursue clarity.

Even “outcomes,” “results,” and “effects,” without regard to intentions, can be problematic as generic expressions for what social enterprises will be held to account through regulation, incentives, or in practice. Adding modifiers such as “positive,” while slightly better, is still too vague. Relying on these concepts has at least two problems. First, finding causal connections between effort and results is “fraught, imprecise, and expensive” (Dadush 2018, 444). Second, and more practically, such reliance is likely to disincentivize engagement and is inconsistent with approaches in traditional for-profit and charity contexts that most people more readily understand. Why would anyone want to be personally liable for failure to achieve projected future outcomes, results, or effects?

Legal/regulatory accountability in the for-profit context is not for any of these terms. For-profit companies lose money all the time, some to the point of going out of business with corresponding financial losses. Under the business judgment rule, there is no legal or regulatory recourse against decision-makers or the company if decisions were made in good faith, with adequate information, and with conflicts of interest having been managed properly. In other words, with the business judgment rule, there is no legal or regulatory recourse if decisions were made consistent with fiduciary duties of care and loyalty (ebay Domestic 2010; Giulano 2024, 903; Mantese and Louis 2020; Palella 2024, 2; Simeone 2023, 971–73). Through the fiduciary duty of care in for-profit companies, legal accountability is to process rather than to outcomes, results, etc. (Giulano 2024, 903).

The same applies in the charitable context, except that instead of losing money, the corollary outcome, result, or effect is failing to achieve charitable objectives (or maybe even generating harm), although losing money might be involved, too. If decisions are made in good faith, with sufficient information, and without illicit conflicts of interest – that is, consistent with duties of care and loyalty (and perhaps obedience) – there is no personal liability, nor should there be (American Law Institute 2021; McCord 2024, 43, 49, 50). Again, legal duties in charitable nonprofit entities are also to process.

In both for-profits and charities, things sometimes do not go well and are beyond one’s ability to control or predict. In the U.S., attaching personal liability and/or governmental accountability has been deemed extreme and counterproductive in both contexts. Of course, directors, officers, managers, and others might be replaced through private decision-making – most notably by owners of for-profit companies. Imposing personal liability or governmental accountability is not imposed in either context. Nor should it be.

Why should the standard be different – and especially harsher – for truly social enterprises? Of course, social and owner accountability exist for social enterprises, and they should. Imposing legal regulatory accountability and/or personal liability for the outcomes, results, or effects of a social enterprise would likely further destabilize the uses of social enterprise rather than encourage them.

Maybe when people invoke “accountability for outcomes,” they don’t mean personal liability or governmental accountability. But, as noted above, that is part of the problem in trying to develop, regulate, or engage in the “middle” social space. People too often say one thing but mean something else entirely.

This does not leave a regulatory vacuum. There can and should still be personal and governmental oversight and accountability based on fiduciary duties and whether decision-makers act in good faith, with requisite knowledge and information, and without illicit conflicts of interest – as is the case with for-profit companies and charitable nonprofits; that is, to process. However, in the U.S., there is no legal structure that reorders fiduciary duties to require that heightened commitment to social good be consistently and persistently prioritized over owners’ financial interests such as would evidence a differentiated “middle” space. Other mechanisms under law must and can be relied on to bring accountability, including laws regarding securities, consumer protection, fraud and misrepresentation, and otherwise.

3 Meaningful Differentiation: Commitment, Persistence, and Intentionality

In some ways, meaningful differentiation might be thought about in terms of means and ends (see Bebchuk and Tallarita 2020, 109, 114; Dodge 1919, 684; Karametaxas and Huber 2023, 508, 598; Spence 2025, 27, 65; Tyler 2020, 970; Utah 2025, 21–25). Are socially good efforts and outcomes a means to the end of owners’ financial interests? Or are such efforts and outcomes the ends for which financial interests are a byproduct, conduit, or means? The first is generally considered consistent with for-profit models and approaches, while the second might be more indicative of a social enterprise.

In that regard, the ultimate differentiating feature seems to be the degree of commitment to social good. Related would be whether that commitment remains consistent over time and persists through changed circumstances. A third component might assess intentionality about how behaviors connect to achieving socially good outcomes.

Regarding commitment, even the greediest for-profit endeavors will at least tolerate social good as they maximize distributable profits and capital growth. Moreover, some for-profit endeavors sometimes pursue and achieve social good with great intentionality while still prioritizing owners’ financial interests (Ebrahim et al. 2014, 84; Tyler et al. 2015, 301). Differentiation would seem to require that social enterprises in the “middle” space demonstrate an elevated commitment to social good to provide clarity for regulation, accountability, and incentives. As a practical matter, clarity of such commitment also can facilitate alignment within and across stakeholder groups, especially investors and entrepreneurs, but others too, including decision-makers at charitable nonprofits and those with whom they collaborate.

Figure 1 presents a spectrum for conceiving of relative commitments to priorities of purpose.^[1] Both social good and financial interests can be juxtaposed on the spectrum, albeit not necessarily in a directly inverse relationship. For instance, devotion to or focus on owners’ financial interests likely means tolerating – or perhaps awareness of or even support for – social good. Similarly, a focus on social good is likely to involve a neutral awareness of the owner’s financial interests or perhaps more likely to welcome permissions for it.

Figure 1:

Commitment to priority of purposes (Tyler 2018a, 2018b).

A company’s decision-makers cannot always be devoted to both social good and owners’ financial interests. At some point, interests irreconcilably collide, and one purpose must give way to another. That will be the priority, which is why Figure 1 does not include a purely middle option. Also, a company and its personnel are not likely to be perpetually agnostic about social good and financial interests such that each is merely tolerated or permitted. A company will be devoted to or focused on one while tolerating or being aware of the other, or it could favor one and permit the other. Or the priorities might change over time and circumstances.

Leaders of charitable nonprofits that operate or are contemplating operating in the social good “middle” or even for-profit spaces need to be clear among themselves about where their priorities of purposes lie on this continuum along with understanding the degrees to which those with whom they collaborate are or are not aligned.

Query: which combination(s), if any, differentiate sufficiently from traditional for-profit approaches to justify a unique regulatory regime and corresponding incentives for operating in the “middle”? While many situations can allow for both social good and profitability, when interests collide, it seems that a social enterprise must prioritize social good over owners’ financial interests. Returns need not be concessionary as a feature or requirement, but circumstances may be such that concessions might become necessary. Of course, concessionary returns, dividend caps, reinvestment requirements, and asset locks would, by definition, reflect an ordering of priorities in which the legal structure or enterprise is devoted to or focused on social good, but they aren’t the only way to do so. Merely favoring social good may be harder to ascertain, much less regulate or incentivize.

The context will matter, and words alone are not likely ever to suffice (Bohinc and Schwartz 2021, 5). Words can too easily be a “branding exercise” (Liao 2018, 114), good marketing (Andreadakis 2023, 893; Gartenberg 2023, 1), and/or reflect “greenwashing,” “purpose washing,” or being a “pseudo-social enterprise” (Andreadakis 2023, 893; Fici 2023, 158; Liao 2018, 103). Behaviors reflect the commitment to which those involved can align (e.g. investors, entrepreneurs, customers, employees, creditors, charitable nonprofit decision-makers and their collaborators, etc.), understand (e.g. researchers, regulators, etc.), and/or promote/incentivize (e.g. policymakers, others). Within the context of decision-making, those behaviors could include what options were considered, how the pros and cons of each were deliberated, whether or how accountability and assessment were factored, and ultimately what was rejected and why and what was decided and why.

Another consideration for ascertaining commitment is the ease with which decision-makers may change or deviate from any given priority. Stated differently, whether any commitment to social good as a – or the – priority purpose should be a nearly permanent, perpetual condition and not be subject to relatively easy modification (Bohinc and Schwartz 2021, 16 re Etsy). Easy modification, which is one of Brakman Reiser’s criticisms of the L3C (2013, 2010; Brakman Reiser and Dean 2017b), could present regulatory challenges--not to mention market engagement problems for investors and others -- if a company can evade accountability by merely converting to or reprioritizing something else with impunity.

The book The Tipping Point: How Little Things Can Make a Big Difference (Gladwell 2002) has a chapter on how certain marquis, for-profit businesses advanced their owners’ financial interests by serving various social goods, including stakeholder interests. Another part of the chapter, though, points out how transient that emphasis can be and the detrimental economic effects of deviating to focus on profitability while, at best, permitting – but perhaps more likely merely tolerating – consideration of social good defined broadly.

While flexibility across purposes and priorities may be useful (even inherent) in a for-profit context, consistency and persistence of priority should be defining characteristics of social enterprise if it is to be understood and treated differently from traditional for-profit approaches.

The same may be said about the intentionality with which behaviors reliably and predictably result in achieving social good outcomes (Tyler 2018a, 2018b). In the for-profit context, such reliability is generally connected to behaviors that generate revenues. For-profit companies do not last long if there is not at least some correlational (if not causal) connection between their goods, services, and revenue generation and levels thereof. Correlational, causal, and instrumental connections to profitability can be replicated, repeated, and scaled because the business understands and can be intentional about connecting its behaviors with revenue outcomes. Arbitrary, accidental, or incidental connections are substantially harder to predict and thereby monetize.

The analysis should be similar for social enterprises in the “middle,” except that the objective is not revenues for their own sake but instead is intentionality in connecting behaviors with socially good outcomes in ways that can be replicated, repeated, and scaled. Mere arbitrary, accidental, or incidental connections do not reliably enable such pursuit of those socially good outcomes.

4 Differentiating Based on Legal Structures and Modalities

We can look at how other jurisdictions have or have not undertaken to differentiate their social enterprises from traditional for-profit companies and/or charities to evidence commitment, intentionality, and persistence. This essay first samples non-U.S. legal structures before considering how the still relatively new hybrid, blended structures in the U.S. compare with traditional approaches. The essay then presents how various features – modalities – in non-U.S. and U.S. approaches advance differentiation or confusion, thereby enabling regulation or not, and perhaps even practical clarity, including especially for decision-makers at charitable nonprofits.

5 Conclusions

We need to be clear about what we mean by “social enterprise,” what is covered and why, and what is excluded and why. A “broad tent” foments confusion, which can harm investors, entrepreneurs, employees, consumers, charities, donors, volunteers, researchers, boards and management of charitable nonprofits, etc. It might also generate unfair and unwarranted competitive advantages and corresponding disadvantages (Peter and Pfammatter 2023, 841, 852).

Perhaps there is a critical mass of enterprises in the U.S. whose operations meet the standards for being differentiated social enterprises that operate in the “middle” as described throughout this essay. If so, then perhaps regulation and incentives might be appropriate and even helpful for bringing greater clarity and better accountability. A comprehensive research project to that effect might be worthwhile. When there is a critical mass of differentiated activity or paralyzing/litigation-generating confusion, then perhaps policymakers and regulators might be more inclined to provide formal guidance and incentives that properly and unambiguously differentiate this space and its enterprises from traditional spaces and operations. In the meantime, the status quo does not leave a regulatory vacuum, given the application of for-profit means that are available.

As much as this essay presents criteria for juxtaposing against traditional approaches to suggest that differentiation is lacking, the same criteria (commitment, intentionality, and persistence) might be adopted with a forward-looking view toward how regulations and incentives might be used prospectively to build a differentiated “middle” space, facilitate attracting resources to it, and better enable its contributions to society.

Those responsible for charitable nonprofits – and others – can also use the same three criteria to facilitate questions, discussions, and ultimately understanding and thereby secure alignment and compliance for their charitable nonprofits while also exposing those who are competing unfairly.