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Businesses in Washington state will soon have a new structuring option that facilitates the pursuit of both profits and a social purpose. On March 30, 2012, Governor Gregoire signed SHB 2239 into law, which creates a new hybrid business structure called a Social Purpose Corporation (“SPC”). The new law is effective June 7, 2012. An SPC can be organized to promote a general social purpose or a specific social purpose. If organized for a general social purpose, an SPC must conduct its business in a manner intended to positively impact short- and long-term effects of (i) employees, suppliers, or customers; (ii) the local, state, national or world community; or (iii) the environment. A specific social purpose may also be stated.
Key differences between SPCs, general corporations and nonprofits
The SPC structure is unique because it would allow directors and officers to make decisions that further the entity’s social purpose without having to consider whether the decision also maximizes financial benefit. Currently, directors and officers of for-profit corporations have a duty to maximize the financial return for shareholders. Directors and officers thus face a risk of liability if they make decisions on another basis. Under the new law, directors and officers would be permitted (or required, depending on the structure elected) to make decisions on the basis of the stated social purpose rather than maximizing financial return. Any such decisions would be deemed in the best interest of the corporation. For example, in a business sale, directors of an SPC could consider offers from buyers based on compatibility with the business’s social mission rather than the highest price. The SPC structure may be particularly appealing for corporations that have shareholders who are not involved in the business’s management.
This new corporate form will create business restructuring opportunities for entrepreneurs that want to make money while pursuing a social mission. Many businesses that are socially driven currently organize under Washington’s Nonprofit Corporation Act so as to qualify for federal tax-exempt status. In a nonprofit corporation, however, income may not inure to the benefit of any individual. An SPC presents a new option that would allow owners to collect profits while furthering a purpose more typically associated with a nonprofit. A downside is that, unlike most nonprofit corporations, an SPC would not qualify for federal tax-exempt status. Therefore, businesses hoping to attract grants and charitable contributions would best be served by operating as a nonprofit corporation rather than an SPC.
Electing and maintaining SPC status
New corporations can opt into the SPC statute by including provisions in their Articles of Incorporation stating the social purposes of the business and including a disclaimer that the corporation may be contrary to maximizing profits or shareholder value. Existing corporations can elect to become SPCs by amending their Articles of Incorporation to include similar provisions following approval by at least two-thirds of the shareholders. An SPC’s name must include the words “Social Purpose Corporation” or “SPC.” Additional disclaimer language must be included in shareholder stock certificates. Changes that would revoke or compromise SPC status will require a two-thirds vote of the shareholders.
Under the new structure, directors will be required to furnish shareholders with an annual report of the corporation’s performance assessing its social purpose and must make the report available to the public on the company’s website.
Much remains to be seen how SPCs will be used in Washington. However, one thing is clear: Starting on June 7, 2012, SPCs will present a new vehicle for entrepreneurs to pursue profit-driven and social missions within the same entity and should be considered as a structuring option in the business formation and transition process.
Matthew Bisturis is an attorney in the Vancouver office of regional law firm Schwabe, Williamson & Wyatt. Matt focuses his practice in the areas of business and real estate transactions and can be reached at mbisturis@schwabe.com or (360) 905-1113.
