Since the first hybrid enabling law was passed in Vermont in 2008, the number of states offering hybrid forms has grown steadily, as has the number of entrepreneurs choosing statutory hybrids as a middle road between the for-profit and the nonprofit. Plaudits for and criticism of the hybrid form have also proliferated. Proponents have lauded their ability to facilitate socially conscious enterprise. Detractors have questioned the viability of the hybrid form and have suggested that they create more fiduciary conflicts than they resolve. To date, however, there has been no serious scholarly publication addressing the appropriate tax treatment of hybrid entities even though some supporters of hybrids have asserted that these forms deserve tax preferences.

In this Article, we close that gap by thoroughly examining the arguments for tax preferences and the likely consequences that would flow from offering such preferences. We conclude that hybrid entities should not receive tax preferences traditionally offered to nonprofit entities because such an extension of tax benefits would likely have a deleterious effect, not only on the charitable sector and the public fisc, but also on hybrids themselves. Such an extension would almost certainly require a much clearer and narrower definition of public benefit that would undermine the much-touted flexibility offered by the hybrid forms, shift the financial risk of a hybrid not providing significant public benefit from its investors and donors to the public at large, place a substantial and likely unsustainable burden on the federal government to ensure that profitmaking does not trump providing public benefit, and threaten to undermine public support both for hybrid forms and for the existing tax preferences enjoyed by nonprofits. At the same time, we also conclude that some modifications to existing tax laws are appropriate in that they would acknowledge hybrids’ virtues while not exacerbating their potential weaknesses.

 

Read the full article.