Social Purpose Corporation – May Consider Public Benefit In Addition to Maximizing Profit

Since 2012, California has created two new corporate structures: (1) the social purpose corporation; and (2) the benefit corporation.  Unlike traditional for-profit corporations, these new corporate structures are permitted to consider the public benefit in making corporate decisions.

The primary purpose of a for-profit corporation is as stated in the name —  for profit. (See here for a discussion of Dodge v. Ford, holding that corporations must maximize profits for shareholders.)  Case law is clear that a corporate board of directors must make corporate decisions that ensure the primacy of this purpose. In making decisions at a for-profit corporation, it is not permissible for the Board of Directors to consider other purposes, such as any benefit to the public or to the environment.  The only thing that may be considered is maximizing shareholder profit.  (That’s why is makes no sense to have for-profit health care corporations.)

In contrast, a social purpose corporation or a benefit corporation allows the Board of Directors to consider factors other than *profit* when making decisions.  Note however, that these new corporate entities are not tax exempt, and are therefore different than non-profit corporations.   These new corporate structures seek to straddle some of the rigid distinctions that existed under the non-profit/for-profit corporate dichotomy.

The California social purpose corporation was originally called a “flexible purpose corporation†as discussed in my earlier article.  In 2014, the legislature amended the name from “flexible purpose corporation†to “social purpose corporationâ€.

A social purpose corporation has specific requirements that are different that other types of corporations.  For example:

(1) The Articles of Incorporation must include a statement of certain enumerated purposes.

(2) In addition to the enumerated purposes, the Articles of Incorporation must state that the purpose of the social purpose corporation is to engage in one or more of the following purposes:

(A) One or more charitable or public purpose activities that a nonprofit public benefit corporation is authorized to carry out.

(B) The purpose of promoting positive effects of, or minimizing adverse effects of, the social purpose corporation’s activities upon any of the following, provided that the corporation consider the purpose in addition to or together with the financial interests of the shareholders and compliance with legal obligations, and take action consistent with that purpose:

(i) The social purpose corporation’s employees, suppliers, customers, and creditors.

(ii) The community and society.

(iii) The environment.

The Board of Directors of a social purpose corporation is required to annually prepare a report to shareholders containing, among other things, a discussion of the short term and long term objectives of the corporation; the material actions taken to achieve its special purpose objectives; the impact of those actions; and the extent to which the actions achieved the special purpose objectives for that year.

In California, a benefit corporation “shall have the purpose of creating general public benefit.†And, the benefit corporation “may identify one or more specific public benefits that shall be the purpose or purposes of the benefit corporation.†Like social purpose corporations, benefit corporations have specific accountability requirements, however, the accountability requirements are more rigorous for benefit corporations.  Benefit corporations are required to use a third party to prepare the annual shareholder report, while a social purpose corporation may prepare the annual report itself, provided it meets certain reporting requirements.

The difference between a benefit corporation and a “B Corporation†is that a specific third-party, B Labs, is used as the third party evaluator for “B Corporationsâ€.  A benefit corporation may use other third-parties to evaluate the corporation and prepare the annual shareholder report.  B Labs has recently published a list of the best B Corporations in 2015, showing that B Corporations can be any size and have a wide variety of public benefit purposes.  

CONCLUSIONThe benefit corporation and social purpose corporation are relatively new corporate structures.  They provide flexibility that is often desired in today’s economy where many corporations are trying to do good in the world, in addition to generating profit for shareholders.

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