Social entrepreneurship refers to pursuing social value through business. This model sits at the intersection of private gain and public good, raising questions about the purpose of business and the limits of market-based solutions.

Although the practice is growing in popularity, the traditional legal mechanisms governing for-profit corporations still struggle to accommodate the diverse interests of a social enterprise. I and some of my colleagues at the Startup Law Clinic have spent the past few weeks looking into this issue.

One way of framing the issue is to recognize corporations as tools designed for a specific purpose. Just as carpenters, business people, and artists rely on tools which serve particular functions in the course of their work, corporations are ultimately structured to serve one central aim: generating profit. The vast network of rights, responsibilities, and powers within corporate law exists to support profitability or to regulate the boundaries of profit creation.

Discussions of social entrepreneurship eventually confront the fact that it attempts to merge two purposes that can work against each other. “Social” captures goals of collective or ‘pro-social’ benefit, while “Entrepreneurship” introduces the tools and expectations of the business world, which are fundamentally oriented toward investor profit. The central question becomes whether these two purposes can coexist within the same organizational structure.

The difficulty does not lie merely in the difference between these goals, but in the way maximizing economic outcomes often requires compromising other values, which creates direct tension with social aims. In traditional corporate frameworks, sacrificing alternative values is not considered a problem. Profit comes first, even when its pursuit causes harm. A corporation that “poisons the well” but earns a million dollars is, in that framework, simply doing its job.

Ideally, regulators will intervene by imposing fines or enabling civil liability, ensuring that harmful actions come with financial consequences. Once those consequences outweigh the benefits, it is no longer profitable for the corporation to engage in the harmful behavior. In this system, moral judgments fall to regulators, not corporations or their directors, whose mandate is to maximize economic return within the constraints set by publicly accountable government.

The challenge for market tools in achieving social good is therefore not the inherent anti-social motives of corporate owners, but the economic expectations of investors. One major focus of the Startup Law Clinic is helping new companies understand how to attract investment and what contractual terms they should expect. We aim to increase corporate literacy so that founders can better navigate their own interests and responsibilities.

Investors typically deserve substantial returns because they assume substantial risk. Start-ups frequently fail; sometimes because they misjudge a market, encounter bad luck, or are mismanaged. When they do, investors absorb most of the implied loss. Investors fund the corporation, not the other way around, in exchange for the chance at exponential returns. Their entitlement to profit is thus tied directly to the risk they bear, and corporate law has long treated profit distribution as the primary mechanism that validates investment.

This tradition is well-established in North American corporate law. For us as student caseworkers, tracing its legal history is a central part of understanding the constraints facing social enterprises. Notably, the legal foundation for shareholder-centric profit seeking is far more rigid in the United States than in Canada. Whereas American discussions often return to cases like Dodge v. Ford, Canadian social entrepreneurs may look to the flexibility suggested by BCE Inc. v. 1976 Debentureholders. Some academics even argue that decisions like BCE reduce the need for government intervention, though our own analysis leads us in a different direction. An outlook we look forward to sharing.