Social Enterprise, Job Creation and Community Development

When I signed on to this task with the State of Tennessee, I committed to develop jobs through earned income strategies and practices. I was not asked to, nor did I commit to, limit this economic development effort to those models associated solely with the not for profit world. Throughout the last eighteen years of community economic development, and as a direct result of refining and growing a social purpose strategy that allowed ARC-D to meet the requirements imposed by participation in three federal system change projects, I created, in addition to the not for profit Advocacy and Resources Corporation, a number of additional social purpose businesses.

A social purpose business is a “discrete division, subsidiary or related corporation of a nonprofit or a for-profit company that deliberately pursues financial and social returns within a specific industry segment in the commercial marketplace.”[1] These not for profit and for profit entities that reflected (1) the need to leverage resources to support the development of community services, employment training and/or housing, (2) support to the needs of the not for profit agency and its’ customers and (3) filled a vacuum created by the lack of vendors available to close the supply chain gaps necessary to support the new procurement practices environment that emerged with the ‘reinvention of government.’ These vendors were planned for under Tennessee’s corporation rules,[2] incorporated within the necessary legal and auditing environment, and reflected the agency strategy for insuring that the very best cost structure would be passed on to the government in accordance with constraints imposed by Federal Acquisition Rules (FAR Part 48).[3]

These entities were disclosed, audited, and banked by the same lenders that banked the not for profit organization, with full disclosure and electronic visibility of financial transactions between the entities in place between the companies at the lender level. They included three not for profit and four for profit taxable entities, all designed to serve specific purposes to further the social enterprise community development mission while keeping subcontracting dollars flowing into our local vendor community without compromising the ARC’s not for profit status. The related (shared board members with ARC) business entities were:

• Development Opportunities Inc. (DOI), a not for profit land bank formed for developing housing for persons with disabilities;
• Falling Water Construction (FWC), a not for profit trades training program designed to build the houses and maintain agency facilities;
• Homeowner Dream Management (HDM), a consumer homeownership training program;
• Tennessee Analytical Services (TAS), a taxable for profit laboratory owned by the agency’s Board of Directors.

The for profit, controlled group business entities were:

• TCOMUS, a taxable for profit entity set up as a woman-owned microenterprise for the purpose of supported the esoteric requirements of the US Navy and DoD beyond the set-aside purpose of ARC’s set-aside contracts;
• Lewis-Durm Logistics (LDL), a taxable for profit small business which provided trucking and bulk oil supports when the available vendors to the vegoil program were unable to fulfill requirements;
• Fruition Foods, a taxable for profit research entity designed to engineer commercial frozen products for eventual commercial sale or set-aside; and
• McRae Durm Properties, the partner ownership of a hubzone-located building (formerly owned by IWC) procured and improved for the unitized group rations program (UGR-A), which was commercially awarded and slated for a future JWOD set-aside.
  

Each of these entities properly reflected the IRS requirements for separating the distinct missions, accounting for revenue generated by the activity, and instituted the construction of a ‘firewall’ between the organizations for the payment of taxes on unrelated business income (UBIT),[4] and hiring of nondisabled personnel, while closing the vendor gaps in support of the agency contracts and while offering services to others. Between them, they employed forty five low-income persons whose socioeconomic status did not qualify for employment through ARC.

The IRS audited the for profit entities not owned by ARC in 2005[5] and assisted by a contracted certified public accounting firm, determined that these entities should be handled as a ‘controlled group’ with unrelated business income taxes and outstanding equipment notes paid down, taxed and passed through the tax returns of the owner operators as ‘management fees.’[6] Wages and salaries did not accrue to the registered agent of record, ARC board members, or the registered owners of these entities. In keeping with the model adopted, profitability was retained and reinvested within the social purpose businesses, and supervision was provided by a General Manager.[7]

ARC did not contribute funds to the for profit entities of TCOMUS, LDL, Fruition Foods, or McRae-Durm Property, nor did these entities enjoy less than fair market benefit from their relationship as a supporting vendor to ARC. These facts are a matter of public record and were absolutely handled in accordance with IRS Publication 598-Unrelated Business Income[8] and OMB Circular A-122 – Costing and pricing rules for not for profit organizations[9] and A-133 –Audit rules for not for profit organizations.[10] Over the years of their operations, transactions between these entities and ARC were carefully scrutinized, audited, and disclosed in the agency’s books and minutes and annual financial report. In the aftermath of ARC’s bankruptcy filing, all of these entities were closed and employees released.

Reinvesting its’ earned income, or net return, ARC contributed startup capital to the not for profit entities Development Opportunities Inc, Homeowner Dream Management, Falling Water Construction, and the board owned for profit Tennessee Analytical Services (TAS) as part of a comprehensive agency community development plan. Five banks and nearly forty persons drawn from the community participated in the design of these entities over a multi-year period. Each had separate boards, structures, bylaws, and missions, including land-banking, homeowner counseling, construction trades training and analytical services. At the time of this writing, all of these entities have been terminated, employees and programs terminated, their assets reabsorbed into the bankruptcy estate of ARC, and for the most part, sold at pennies on the dollar. [1]

[1] The Trustee occupied the leased building on Whitney and Willow for nine months post petition, and despite pleas to assume responsibility for maintenance during the period of occupation, failed to allow routine maintenance of the freezer equipment. This led to the spoilage and wasting of nearly $500,000 worth of edible foodstuff under the care and custody of the Trustee, and led to the unnecessary damage of compressors and fixtures. When the building was finally abandoned by the Trustee in February 2008, eighteen dumpster loads of spoiled food and garbage were removed from the property occupied by the Trustee; the widespread and completely unnecessary damage to the building fixtures and equipment were documented by photos and inspection by insurance adjusters.