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Public Benefit Corporations – Social Purpose Corporations

Public Benefit Corporations - Man on green lawnMany entrepreneurs start businesses to do good for the world. Entrepreneurs often struggle with whether they should start a regular, for-profit business, or structure a nonprofit. Nonprofits, however, are fundamentally different from for profit businesses. Many business owners find nonprofits too constraining on important issues like being able to make a profit and needing to manage the business with a Board of Directors.

NEW California Corporation OPTIONS!

Fortunately, there are some cool options. Two of these, the public benefit corporation and the social purpose corporation have been available in California since 2012.

What Are Public Benefit Corporations?

Public Benefit Corporations - Social Purpose CorporationsPublic Benefit Corporations are essentially corporations that include a social, or environmental benefit in their corporate purpose. Businesses structured as benefit corporations are legally required to prioritize a positive social impact in addition to making profits for shareholders. Unlike nonprofit corporations, public benefit corporations do not receive tax-favored status. But, unlike regular, for profit, corporations, public benefit corporations can consider the mission of the corporation above the need to make money for shareholders.

Public benefit corporations must feature the following elements:

  1. Public Benefit Corporations must have a purpose to achieve a “general public benefit” that has a “material positive impact on society and the environment.”
  2. The Public Benefit Corporations is accountable through a fiduciary duty not only to corporate shareholders, but also the workers, community, and the environment.
  3. The Public Benefit Corporations is run transparently, and must publish public annual reports on its overall social and environmental performance against an independent, and transparent, third-party standard.

Besides stating in your articles of incorporation that your Public Benefit Corporations is pursuing a general public benefit, you may also want to include specific public benefits in your articles. California law identifies the following as possible specific public benefits:

  • providing low-income or underserved individuals or communities with benefit products or services,
  • promoting economic opportunity for individuals or communities beyond the creation of jobs in the ordinary course of business,
  • preserving the environment,
  • improving human health,
  • promoting the arts, sciences, or advancement of knowledge,
  • increasing the flow of capital to entities with a public benefit purpose, and
  • the accomplishment of any other particular benefit for society or the environment.

What Are Social Purpose Corporations?

Another conscientious corporate structure is the social purpose corporation. Like benefit corporations, social purpose corporations are hardwired to their goals of positive social impact. Directors of social purpose corporation are required to take the company’s mission into account in their decision making. This helps protect the Directors from pressure from investors to take actions that might make profits, but are contrary to the social purpose corporation’s social purposes. For example, the Directors could decide to cease business with a cheap supplier, with shady labor practices, or could decide not to sell to another entity that does not share the stated value of the social purpose corporation, even though doing so might make the corporation more profitable.

Differences between Public Benefit & Social Purpose Corporations?

What Are the Differences Between Public Benefit Corporations and Social Purpose Corporations?
There are some differences between social purpose corporations and public benefit corporations. While benefit corporations must state their mission to provide a general public benefit in their articles, social purpose corporations have more flexibility in defining what their non-financial goals are. These are broadly defined in California law as “special purpose” activities, pursuing short- or long term beneficial effects of the social purpose corporation’s activities on its employers, suppliers, customers, creditors, community/society, or the environment.

Like Public Benefit Corporations, Social Purpose Corporations are required to produce an annual report documenting progress on their social goals. However, unlike benefit corporations, social purpose corporations are not required to include measurement against third-party standards in these reports.

So, it is more work to set up and run these types of companies. But, the advantage is a shareholder cannot sue you for taking things like the environment into account over corporate profits.

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