Jude Martin is one of Seattle’s serial entrepreneurs. With two successful clean technology startups to his credit, he has something a little less business and a little more philanthropic in mind for his next venture. And he has the insanely great idea and the funding for another success.
What he hasn’t found is a corporate structure that supports his socially responsible vision, the implementation of which will impact the new venture’s bottom line: The company will donate a percentage of its gross profits to environmental causes. It will also give preference to American companies that demonstrate a commitment to the environment and worker safety when choosing suppliers and other partners.
Socially-responsible for-profit companies have traditionally been limited in their social and environmental engagement by a fiduciary duty to maximize financial returns for shareholders. Too much spending on social goals can put the company’s officers and directors at risk of shareholder lawsuits.
The ideal corporate entity for many socially responsible entrepreneurs like Jude is something between a for-profit corporation, with its fiduciary duty to maximize shareholder returns, and a not-for-profit organization that accommodates a social mission but can’t provide a financial return to shareholders.
And now they have it.
The 2012 Washington State Legislature created a new corporate entity under Title 23B of the Washington Business Corporation Act, the social purpose corporation. Effective June 7, 2012, new ventures like Jude’s—as well as existing private and public corporations in the state—can transparently pursue social and environmental goals in addition to their business purposes.
Definition of a Social Purpose Corporation
According to the new law, a social purpose corporation is a for-profit corporation “organized to carry out its business purpose… in a manner intended to promote positive short-term or long-term effects of, or minimize adverse short-term or long-term effects of, the corporation’s activities upon any or all of (1) the corporation’s employees, suppliers or customers; (2) the local, state, national or world community; or (3) the environment.”
It may also have one or more specific social purposes.
In other words, it has additional flexibility to consider other stakeholders impacted by its decisions, not just its shareholders. If they follow the rules, the officers and directors of for-profit social purpose corporations can transparently pursue social and environmental goals in addition to the financial goals of profitability, shareholder value and return on investment—without risking legal liability for doing so.
The new law includes procedures for corporations electing to be governed as a social purpose corporation and for existing social purpose corporations to elect out.
Becoming a Special Purpose Corporation
New and existing corporations, from startup to public company, can become social purpose corporations.
A new corporation elects to be governed as a social purpose corporation by filing articles of incorporation that satisfy specific requirements of the new law, as described below. The election process for existing corporations includes a board recommendation, approval by a 2/3 majority of the voting shareholders, and amended articles of incorporation.
The stock certificates of special purpose corporations are also subject to new requirements.
Requirements for the Articles of Incorporation
A social purpose corporation must include a statement in its articles of incorporation declaring that it is a social purpose corporation under the newly enacted chapter of Title 23B RCW, and its name must include the words “social purpose corporation” or SPC.
The articles of incorporation must also include statements describing the corporation’s general social purpose and any specific social purposes, as well as the following text:
“The mission of this social purpose corporation is not necessarily compatible with and may be contrary to maximizing profits and earnings for shareholders or maximizing shareholder value in any sale, merger, acquisition or other similar actions of the corporation.”
Other optional provisions that social purpose corporations can include in their articles of incorporation include explicit requirements that directors and officers consider the impact of their actions on the corporation’s social purpose, that the corporation provide shareholders with a third-party assessment of performance with regard to its social purpose, and even a limit on the corporation’s existence.
Provisions Protecting Officers and Directors
The officers and directors of a social purpose corporation are allowed to “consider and give weight to one or more of the social purposes of the corporation” in fulfilling their duties, unless the articles of incorporation state otherwise.
Their actions (or inactions) are assumed to be in the corporation’s best interest if they reasonably believe they are promoting the corporation’s social purpose. In other words, they can make decisions that advance the company’s social mission without the risk of legal liability, even if their decisions may reduce shareholder value as a consequence.
All social purpose corporations are subject to additional reporting requirements relating to their social purpose goals and achievements.
Within four months of the end of its fiscal year, a social purpose corporation must provide its shareholders with a social purpose report that describes short-term and long-term goals, as well as the actions it has taken and will take to achieve its social purpose. It must also explain the financial, operating and other measures used to evaluate performance.
This report must be accessible to the public, free of charge, from the company’s principal web address—and remain accessible until the end of its fiscal year.
In addition, social purpose corporations can include in their articles of incorporation a requirement that shareholders be provided a third-party assessment of performance with regard to social purpose goals.
Depending on your circumstances, there may be income tax implications stemming from this choice of entity. Give us a call to discuss possible ramifications.