What do you do when you want your business to incorporate positive social or environmental impact goals into its core objectives along with maximizing profits? In California, entrepreneurs who do not want to form a nonprofit but, nevertheless, want to structure their business to take into account a social purpose or a public benefit (and not focus only on maximizing profits for its shareholders) have the options of forming a public benefit corporation or a social purpose corporation. In a traditional corporation, directors and officers must prioritize shareholders’ interests above all else or risk being in breach of their fiduciary duties to them. In these alternative forms, the business must consider the interests of other stakeholders and not just its shareholders in making corporate decisions. Note, however, that, unlike nonprofits, neither benefit corporations nor social purpose corporations get special tax treatment. In many respects they are identical to a traditional corporation. Some of the main feature of these alternatives to a traditional corporation are briefly discussed below.
Benefit Corporation: One alternative to a traditional purely for-profit corporation in California is a benefit corporation. Under this structure, the corporation may pursue public benefit goals along with the traditional goal of maximizing profits for its owners. Benefit corporations are creatures of statute in California and are organized under the General Corporation Law of California. The articles of a benefit corporation must state “this corporation is a benefit corporation”. The articles may also identify one or more specific public benefit purpose(s) which may include:
(1) Providing low-income or underserved individuals or communities with beneficial products or services.
(2) Promoting economic opportunity for individuals or communities beyond the creation of jobs in the ordinary course of business.
(3) Preserving the environment.
(4) Improving human health.
(5) Promoting the arts, sciences, or advancement of knowledge.
(6) Increasing the flow of capital to entities with a public benefit purpose.
(7) The accomplishment of any other particular benefit for society or the environment.
However, the identification of a specific public benefit in the articles does not limit the obligation of a benefit corporation to create general public benefit[1]. The directors and officers of a benefit corporation, in discharging their respective duties, must consider the impact of their actions not only on the corporation’s shareholders, but also on workers, suppliers, and customers of the corporation, the community and society, the local and global environment, and the short and long-term interests of the corporation. In contrast, directors and officers of a traditional corporation need not take the interests of anyone but the shareholders into account and shareholders’ interests are primary to all other interests. To promote transparency, a benefit corporation must annually report, through an “annual benefit report”, on its performance in accomplishing its public benefit goals, using independent third-party standards. Finally, the benefit corporation itself, a shareholder, a director, or a person or group owning 5 percent or more of its stock may derivatively, on the benefit corporation’s behalf, bring a public benefit enforcement proceeding against the directors or officers for violating their duties regarding the benefit corporation’s benefit interests and purposes.
Sidebar: Benefit corporation form is often confused with the B Corp certification from B Lab. B-Corps voluntarily meet certain standards of transparency, accountability, sustainability, and performance, with an aim to create value for society, not just for traditional stakeholders such as the shareholders.
Social Purpose Corporation: The second alternative to a traditional corporation that allows entrepreneurs to consider social and environmental objectives in making business decisions is a social purpose corporation. Like benefit corporations, California social purpose corporations are creatures of statute as well and are formed by filing articles of incorporation that must specifically state one of these special purposes:
– One or more charitable or public purpose activities that a nonprofit public benefit corporation may carry out.
– The purpose of promoting positive effects of, or minimizing adverse effects of, the social purpose corporation’s activities upon:
(i) The social purpose corporation’s employees, suppliers, customers, and creditors.
(ii) The community and society.
(iii) The environment.
Like a benefit corporation, the directors of a social purpose corporation, in discharging their respective duties, are not limited to considering only the interests of the corporation’s shareholders. The directors must consider the best interests of the social purpose corporation and its shareholders, and the purposes of the social purpose corporation as set forth in its articles. In terms of accountability, the board of a social purpose corporation must submit an annual report to its shareholders that includes the corporation’s financial statements and a management discussion and analysis (MD&A) about the social purpose corporation’s stated purpose or purposes as set forth in its articles. The MD&A must identify the corporation’s special purpose objectives and identify and discuss the actions taken to achieve its special purpose objectives, the impact of those actions, and material operating, and capital expenditures made by the social purpose corporation to achieve its special purpose objectives. The annual report must be given to shareholders annually and posted on the corporation’s website. However, unlike a benefit corporation, a social purpose corporation need not use a third-party standard in preparing its annual reports. Also, no statutory provision enables the corporation or its shareholders (derivatively on behalf the corporation) to bring proceedings to enforce the corporation’s special purpose(s). To this extent, a social purpose corporation offers more managerial flexibility compared to a benefit corporation.
To conclude, in contrast to a traditional corporation, both a benefit corporation and a social purpose corporation allow socially and environmentally conscious entrepreneurs to pursue goals other than just maximizing profits. An argument can be made that for future businesses to thrive they will need to incorporate social and environmental goals into their core mission. However, the responsibilities of directors and officers of these alternative corporate forms differ from those of traditional corporations. Therefore, in determining whether to form your business as a traditional C-Corp or choose one of these alternate “not just for profit” corporations, it is always advisable to consult appropriate legal counsel.
M & T Legal can assist in determining if one of these alternatives to a traditional corporation is a good fit for you and with incorporating your business as a public benefit corporation or a social purpose corporation (should we decide one of these is right for you). To learn more about how we can assist, book your free consultation here.
[1] “General public benefit” is defined as a material positive impact on society and the environment, taken as a whole, as assessed “against a third-party standard, from the business and operations of a benefit corporation”.
