Guest contributor Nic Wolfe explains how a Social Purpose Corporation can help you run a business that also helps the world.
Why are you an entrepreneur? For many, it’s just as important to build a company that makes the world a better place as it is to make profits. In fact, doing both can have big benefits. Customers tend to respond positively to businesses that have a social purpose, and for-profit businesses may be able to grow more quickly than their non-profit counterparts, for example. That means a company that does both may be able to do more good, faster.
But from a legal perspective, social good and the standard corporate form do not mix. The purpose of the standard corporation is to maximize profits, which may not be compatible with doing social good. Corporate directors can be (and often are) sued for exploring a focus or expending resources that is in any way inconsistent with maximizing shareholder wealth. For example, Zynga shareholders recently filed a lawsuit against the company for failing to (among other things) capitalize on the mobile market quickly enough.
Fortunately, there is a way to run a for-profit business that has an official social purpose. Think of Newman’s Own, which donates all of its profits to charity. Or d.light Solar, a for-profit company that helps people around the world access reliable electricity.
So how can a socially responsible entrepreneur like yourself do some good like these companies (without being sued by your shareholders)?
How a social purpose corporation can help
In comes Washington’s Social Purpose Corporation (or “SPC”). In Washington, as well as New Jersey, Vermont, Maryland, Virginia, Hawaii, and California, the state legislature has enacted statutes that encourage the pursuit of social purposes.
For example, in Washington, a social purpose can be anything intended to benefit the environment, your community, or your customers/suppliers/employees. The legislature avoided defining a comprehensive list of permitted social purposes. While the legislature failed to provide a specific reason, it’s reasonable to infer that permissible social purposes are to be broadly construed and will not receive much legislative scrutiny (if any).
Here are some pros and cons of the new form.
- Lawsuit Shield: Your corporation receives statutory protection from shareholder lawsuits for pursuing your stated social purpose.
- Public Identity: You get the right to identify as a Social Purpose Corporation (or “S.P.C”).
- Build to Last: You’ll be in a better position to attract social-purpose-minded investors because Social Purpose Corporations are built to last and require a super-majority (2/3), which appeals to this type of investor.
- Simple Formation: It’s less complicated than forming a Non-profit, Private Foundation, or Cooperative.
- Easy Conversion: It’s easy for standard corporations to convert to a Social Purpose Corporation.
- Built to Last: Although it can be easier to attract the right investors, it’s harder to sell or convert to a standard corporation when shareholders are entitled to super-majority approval.
- Not Tax-exempt: The corporation is still subject to applicable sales and use taxes in the same manner as a standard corporation.
- Cashing Out: Dissenting shareholders may be entitled to cash-out rights, which means you’ll have to keep their contributions nearby just in case.
- Status Reports: You’ll need to do annual filings to update the Secretary of State on the status of your corporation’s stated social purpose. Granted, all Washington corporations must generally file reports progress reports of some kind.
What if I’m not a Washington business?
What’s great about Washington’s SPC statute is that it allows foreign corporations to organize under the law. So, if you’re reading from anywhere in the 50 states, and you’re considering utilizing Washington’s SPC form, grab your rain gear and get up here!
Here are the important steps to forming your SPC:
- Add “S.P.C.” or “Social Purpose Corporation” to the end of your trade name. So, instead of Bob’s Burgers, it’s Bob’s Burgers S.P.C..
- Add the following statement to your articles of incorporation: “Bob’s Burgers is organized as a social purpose corporation governed by Chapter 23B.25 of the Revised Code of Washington. The social purpose of Bob’s Burgers is to minimize adverse short-term and long-term effect of the corporation’s activities upon the environment. 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. “
From there you simply organize as you would any standard corporation–by filing articles of incorporation* with the Washington Secretary of State and maintaining annual filings.
*Very basic form available here.
Nic Wolfe is a business attorney in Seattle, focusing on emerging and growing companies. His prior experience includes working as an in-house attorney for a global consulting company, a North American utility contractor, and an entertainment startup. Nic is an entrepreneur at heart. In college, he ran a boat-waxing business, which included in its list of clientele the founder of a well known Seattle tech company. Nic brings the same energy and hard work “polishing up” small businesses in his current role as a local attorney.