Why You Should Consider a Social Purpose Corporation When Choosing Your Business Entity Type
Prior to the emergence of the Washington social purpose corporation (“SPC”) and similar corporate forms in other states, entrepreneurs who wanted to build for-profit companies with specific social values faced a dilemma. They could create a business structured to focus primarily on profits, a corporation. Alternatively, they could create a business focusing on a social mission, a non-profit corporation. But the non-profit corporation could not operate for profit. So if they wanted to be profitable, they couldn’t as effectively capitalize on the socially responsible reputation that non-profits achieved, even if it was an important part of their business identity. However, SPCs can now bridge that gap. In today’s blog post we discuss how an SPC allows a company to more easily pursue profit and a social mission.
In an SPC, your social purpose is a part of your corporate “DNA.” To become an SPC, the law requires that the corporate name include the words “social purpose corporation” or the abbreviation “SPC.” Further, the corporation must promote a general social purpose that is intended to positively affect certain groups of people or “constituencies.” These constituencies must include one or more of: (1) the corporation’s employees, suppliers, or customers; (2) the local, state, national, or world community; or (3) the environment.
In addition, a social purpose corporation may set forth specific social purposes for which the corporation is organized. A Washington SPC’s articles of incorporation must include the following language: “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.” These visible and definite displays of the company’s social mission notifies people, including shareholders, that the company is pursuing a purpose other than profits.
An SPC gives the corporation’s directors latitude to make decisions that promote social values at the expense of profitably without exposing those directors to legal liability. Under the traditional for-profit corporate structure, directors have a duty to act in the best interest of the corporation. This duty has been interpreted as a responsibility to seek to maximize the financial returns for shareholders. If corporate directors take actions that promote a general social purpose at the expense of financial returns for shareholders, they may risk liability for breach of their duties to the corporation. The SPC statutes makes it clear that directors of SPCs can take actions that promote a general social purpose–even if it negatively impacts financial returns for shareholders. This frees SPC directors to more easily make decisions driven by factors other than profitability.
SPCs are required to publish a social purpose report annually on their website. The idea is that the corporation’s efforts to advance its stated social purpose must be transparent. The annual social purpose report must include a narrative discussion of the social purposes of the corporation and its efforts to promote those purposes.
The report may include a discussion of (1) the short-term and long-term goals of the corporation with respect to its social purpose; (2) the material actions taken during the fiscal year to achieve its social purpose goals; (3) future actions the corporation expects to take to achieve its social purpose goals; and (4) the financial, operating, or other measures used by the corporation during the year for evaluating its performance in achieving its social purpose goals. Required reporting also provides SPCs the opportunity to separate themselves from other corporations who use social values (such as being a “green” company) only as a marketing tool.
For those entrepreneurs whose passion for a purpose outweighs the drive to make profits, a social purpose corporation (SPC) may be a good fit when choosing entity type.