Incorporating Socially-Conscious Purposes Into a New Business

Increasingly, new business owners and entrepreneurs are envisioning companies that value social and environmental issues and want to make these values part of the company culture, brand, and purpose. Yet while a corporation can make efforts to create products, market itself, and accept funding in ways that are aligned with certain values, the directors in any corporation have a fiduciary duty to act in the best interests of the corporation. Traditionally “the best interests of the corporation” have been to generate profits for the shareholders, and decisions made for any other reason could subject the directors to a shareholder lawsuit.Luckily, different types of entities exist in California that give directors the ability to consider other interests. More than just sounding good, choosing a company type with a socially-conscious purpose gives directors more flexibility in how they structure, run, and even sell the company, as traditionally without such a purpose the board must approve a sale to the highest bidder without consideration of other factors.The entities listed below provide a survey of the various types of California corporations. The General Stock Corporation is the most well-known entity and provided for comparison, and the other entities are for founders who would like to incorporate a social, charitable, environmental, or other non-monetary purpose into their company activities.

General Stock Corporation:

A for-profit entity with this as its only purpose.

• Articles of Incorporation: purpose of the corporation is “any lawful activity”;
• Interests that the directors must consider when making decisions: the interests of shareholders (paying dividends) take top and sole priority;
• Reporting requirements: annual Board and shareholder meetings are required but do not need to be reported anywhere;
• Best used: when a company wants to take on investors and not be required to consider any objectives besides profit generation.

Benefit Corporation:

A for-profit entity that allows founders to pursue social and environmental goals alongside the traditional objective of maximizing profits (see a more detailed description of benefit corporations here).

• Articles of Incorporation: one of the purposes of the corporation must be creating a general public benefit, plus it may also have a specific public benefit stated;
• Interests that the directors must consider: the interests of shareholders are considered along with the interests of other stakeholders, such as employees, customers, the community, the environment, and the ability to accomplish the corporation’s public benefit purposes, and all must be considered;
• Reporting requirements: required to produce and distribute an annual “Benefit Report” that outlines the corporation’s performance and includes an assessment of the company’s overall environmental and social performance using an independent third-party standard;
• Best used: when a company wants social and environmental goals to play a role in its business strategy, while also taking on investment money.

Bonus: Become a certified B-Corp

“B Corp is to business what Fair Trade certification is to coffee or USDA Organic certification is to milk.” - B LabsCorporations that include the necessary provisions in their Articles, recruit directors who are motivated to fulfill their fiduciary duties, and follow the reporting requirements can be successful benefit corporations. If you are interested in taking the commitment one step further and becoming part of a global network of like-minded businesses, a benefit corporation can become a certified B Corp by meeting performance requirements monitored by B Lab, “a nonprofit organization dedicated to using the power of business to solve social and environmental problems.” Hundreds of companies are B Corp certified, including household names such as Patagonia, Ben & Jerrys, Etsy, Dansko, and Fetzer Vineyards (and Bend Law Group!).

Social Purpose Corporation (formerly known as a “flexible purpose corporation”):

A for-profit entity in which directors are required to consider specific socially responsible purposes, in addition to shareholder interests

• Articles of Incorporation: must set out a special purpose(s) that can be a charitable or public purpose activity, or promoting positive effects, or minimizing adverse effects, of the corporation’s activities upon the corporation’s employees, suppliers, customers, and creditors, the community and society, and/or the environment, provided that the corporation considers these purposes in addition to the financial interests of the shareholders;
• Interests that the directors must consider: the interests of the shareholders and the special purposes of the corporation;
• Reporting requirements: an annual report sent to shareholders containing a management discussion and analysis related to the corporation’s special purpose and corporate financial statements, plus a “current report” must be sent to shareholders when certain financial decisions are made related to the special purpose;
• Best used: when a company wants to take on investment and work for shareholder profits in addition to a specific purpose, but in a more limited way than the many interests considered in a benefit corporation.

Non-Profit Corporation:

A not-for-profit corporation organized for a charitable or public purpose that is designed to benefit the public and typically will apply for tax-exempt status (see a more detailed post, including the differences between non-profit corporation and tax-exempt status, here)

• Articles of Incorporation: must include the specific purpose(s) of the corporation using language that complies with the IRS’s definition of tax-exempt purposes, plus language related to how funds will be distributed if the corporation dissolves;
• Interests that the directors must consider: the specific purposes of the corporation and ensuring that the corporation is not engaging in any non-exempt activities or benefiting any private individuals;
• Reporting requirements: IRS Form 990 or its equivalent and an Annual Report at least sent to the corporation’s directors, plus detailed records of all meetings, compensation, and decisions must be kept in case of an audit, which are more common for tax-exempt organizations;
• Best used: when the company is relying on donors and grants that require tax-exempt status.

Bonus: Fiscal Sponsorship

Fiscal sponsorships are not an entity type, but rather a legal arrangement that allows groups or companies that do not have IRS tax-exempt status to indirectly receive donations from foundations or others who will only donate to 501(c)(3) organization. There are two types of fiscal sponsorships: 1) Comprehensive, wherein the outside group’s project becomes an internal program of the sponsor, such that the sponsor takes on all liability and legal requirements while the outside group may volunteer or become employees of the sponsor; and 2) Pre-Approved Grants, through which the outside group remains a separate entity running the project, and then receives all funds from the project as grants from the sponsor.Fiscal sponsors can be an organization that does similar work and therefore can easily integrate an outside group’s project into its operations, or there are organizations that operate largely to provide fiscal sponsorship services, such as Netroots Foundation. Regardless of the type of fiscal sponsor, it is critical that a well-drafted fiscal sponsorship contract is in place before the project begins for the benefit of the sponsor and the outside group.If you are interested in running a company that has socially conscious goals, it is important to consider the many options available to ensure that your goals and capacity are in line with the abilities and requirements of your entity. Bend Law Group can assist with deciding which entity type is best for your new business, forming your desired entity, applying for federal tax-exempt status, drafting and reviewing fiscal sponsorship contracts, and advising you on annual reporting requirements. If you would like to talk more about any of these issues, please give us a call at (415) 633-6841 or send us an e-mail at info@bendlawoffice.com.Disclaimer: This article discusses general legal issues and developments. Such materials are for informational purposes only and may not reflect the most current law in your jurisdiction. These informational materials are not intended, and should not be taken, as legal advice on any particular set of facts or circumstances. No reader should act or refrain from acting on the basis of any information presented herein without seeking the advice of counsel in the relevant jurisdiction. Bend Law Group, PC expressly disclaims all liability in respect of any actions taken or not taken based on any contents of this article.