Wednesday, February 24, 2016

Social Purpose Corporation vs. Benefit Corporation

*Social Purpose Corporation
*B Corporation
*Which one is better?


On January 1, 2012, new laws regulating Flexible Purpose Corporation and Benefit Corporation became effective in California. It became the first state in the country to provide a Flexible Purpose Corporation.  In September 2014, Governor Jerry Brown signed into law an amendment (S.B. 1301) to the Corporate Flexibility Act of 2011. This amendment renamed the “flexible purpose corporation” as the “social purpose corporation.” SPC directors are now required "to consider and exercise discretion to further the corporation’s special 'social purpose.'”

Thirty states already have Benefit Corporation legislation in place. Most laws require benefit corporations to be partially charitable, with shareholder profit only being one of the many concerns of the B Corp.

Social Purpose Corporation

Senate Bill 201 created the Flexible Purpose Corporation by amending the California Corporations Code. The fundamental concept behind a Flexible Purpose Corporation is basically the same as that of a Benefit Corporation: to give directors the possibility to simultaneously pursue public purposes and shareholder profit maximization.

The articles of incorporation restrict Social Purpose Corporation’s “special purpose” to the following:

-          The standard charitable/public objectives of a nonprofit corporation;
-          Promoting beneficial effects or reducing negative effects upon the environment, community at large or the social purpose corporation’s employees, suppliers, customers, and creditors.

The new law authorizes a social purpose corporation to convert into a nonprofit corporation, a corporation, or another domestic business entity. The law requires the board of directors to identify objectives for measuring the result of the social purpose corporation’s initiatives relating to its special purpose, and to include an evaluation of those efforts in annual reports, together with specified financial statements, to shareholders and would require specified information to be made publicly available. The law also provides that a social purpose corporation is subject to numerous existing provisions of the Corporations Code.
A 2/3+ vote of the outstanding shares is needed in order to change the purpose(s) of a social purpose corporation. The directors will not be responsible to anybody other than the corporation itself and its shareholders for failing to accomplish or pursue the special purposes.

B Corporation

“B” stands for “benefit,” as in “public benefit.” Benefit corporations, established by Assembly Bill 361, may harness the power of business to pursue either general or specific public interest purposes, as well as profit.

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.” Third-party standard is basically an evaluator with no financial interest in the B Corps it evaluates. Enumerated specific public benefits are, without limitation, providing low-income or underserved individuals or communities with beneficial products or services, promoting economic opportunity for individuals or communities beyond the creation of jobs in the ordinary course of business, preserving the environment, and improving human health.”
The new law allows an existing corporation or a non-profit to convert to a benefit corporation. This could be beneficial for a number of tax planning and funding reasons. For example, CouchSurfing (CS), a worldwide hospitality network that connects travelers, was registered as a New Hampshire non-profit organization with its headquarters in California. State-level non-profit status does not provide the tax advantages of the federal 501(c)(3) non-profit registration, and restricts the organization’s ability to accept certain funding. For various reasons, CS was not able to obtain the federal 501(c)(3) non-profit status, while its overhead of maintaining a platform for 3.2 million participants continued to rise. However, by converting to a benefit corporation, CS was able to acquire $7.6 million of venture capital, on terms acceptable to both investors and the vast majority of socially-minded participants of the network.

The law requires the board of directors to prepare a specified statement of the public benefit purposes of the corporation. The law also requires the benefit corporation to prepare an annual benefit report with a statement indicating whether the benefit corporation failed to pursue its general or specific public benefit, an outline of how the benefit corporation sought those benefits, and the rationale for deciding upon the third-party evaluation standard.

Which one is better?

It is tough to say at this point which new entity form is better for what purposes, because much of it is going to depend on how exactly those entities will be taxed and whether other states that currently do not have those forms will recognize them. Generally speaking, shareholders that are not comfortable having too broad of a social purpose to pursue, will probably prefer the possibility of a narrower focus of a social purpose corporation.

The general advantages and disadvantages of both social purpose and benefit corporations are similar:

- May concurrently pursue profit and socially beneficial objectives.
- Directors are protected from personal liability.
- Existing corporation may convert into a benefit corporation or social purpose corporation by amendment to articles of organization, merger or reorganization.

- Potential recognition problems in other states that currently do not have this corporate form.
- Potential for abuse, if directors try to hide own business incompetence and try to justify losses with the pretense of pursuing social interests rather than profit.