WILL BENEFIT CORPORATIONS BE CONSIDERED CHARITIES? - socentlaw

WILL BENEFIT CORPORATIONS BE CONSIDERED CHARITIES?

I have come across two presentation documents recently, both written by practicing lawyers, that suggest the benefit corporations can be considered “charitable organizations” holding “charitable assets” for “charitable purposes” and therefore subject to oversight and regulation by a state attorney general’s charities office. Because it does not seem that the promoters of benefit corporation statutes or state legislatures intended the benefit corporation to be treated as a charity, I feel compelled to inquire into this issue further. Can benefit corporations be considered charities? What about social enterprises regardless of corporate form?

Let’s look to California as an example. The California legislature adopted the benefit corporation statute in fall 2011 and it went into affect on January 1, 2012. The California Attorney General’s Guide to Charities states that “it is not essential to form a nonprofit corporation, a trust or other legal entity to create a charity. In California, any individual or organization who solicits funds and represents that such funds will be used for charitable purposes may be held to be a ‘trustee for charitable purpose’ and accountable for such funds.” One can inadvertently create a charitable trust in California by receiving assets intended for a charitable purpose. Furthermore, the California Attorney General also regulates commercial co-venturers who are for-profit entities “who represent to the public that the purchase or use of any goods [or] services. . . will. . . be used for a charitable purpose.” (CA Gov. Code Section 12599.2(a)).

The question, then, is what is a “charitable purpose”? We find more guidance from the Guide to Charities: “California common law defines ‘charitable purpose’ very broadly to include relief of poverty, advancement of education or religion, promotion of health, governmental or municipal purposes, and other purposes that are beneficial to the community.” The Model Charitable Solicitations Act defines “charitable purpose” as “any benevolent, educational, philanthropic, humane, scientific, patriotic, social welfare or advocacy, public health, environmental conservation, civic or other eleemosynary objectives. . .” (MCSA Section 1(d)(2)). The Model Protection of Charitable Assets Act provides a similar definition: “the relief of poverty, the advancement of education or religion, the promotion of health, the promotion of a governmental purpose, or any other purpose the achievement of which is beneficial to the community.” (MPCAA Section 2(1)).

Now let’s look at the benefit corporation itself. A benefit corporation must have a general public benefit purpose. The “general public benefit” is a “a material positive impact on society and the environment. . .from the business and operations of a benefit corporation” (MBCL Section 102(a)). Taken literally, the definition of “charitable purpose” could apply to benefit corporations, and to social enterprises taking any corporate form because they represent to the public that the solicited funds (potentially covering investments as well as revenue from or a purchased good or service) will be used for a purpose that is beneficial to society. Examples of such companies include TOMS Shoes (a Delaware corporation) that advertises its controversial buy-one-give-one model to the public, or Patagonia that became one of California’s first benefit corporations and donates 1% of its sales to preserve the environment (among other environmentally-beneficial causes). Does Patagonia register with the California State Attorney General under the Registry of Charitable Trusts? I suspect not but I may be wrong.

Challenging the sharp dichotomy between “charitable” and “for-profit” seems to be part of the purpose of the benefit corporation—to embed social and/or environmental values in for-profit businesses by making them more accountable for the externalities that they create and to bring them in line with long-term social and environmental sustainability principles. It is unclear to me if labeling benefit corporations as charities and regulating them through a state’s charitable organizations office is a desirable approach. My gut reaction is that it is not.

If you’re a lawyer who advises social enterprises or benefit corporations, what is your take on the issue? I would also love to have a state attorney general weigh in on this conversation to determine if that state office is contemplating treating the benefit corporation or social enterprises generally as charitable organizations. Perhaps I should make a few calls to state attorney general offices for some answers.

Comments (3)

  1. Kyle Westaway

    October 26, 2012 at 4:19 pm

    Alicia-

    I am a lawyer who advises clients, and I tend to agree with your gut reaction. Social enterprise is a new “third way” which leverages business for positive social outcomes. It should not be subject to the Out dated, binary mode of thinking.

    Furthermore, this argument is a very slippery slope. What about huge fortune 500 companies that have some “charitable purpose” in their CSR departments? Will Ford or P&G now be subject to the regulation of the state Attorney General.

    Lastly, from a practical perspective, most states have neither the inclination nor the resources to increase the amount of entities the Attorney General’s office regulates.

  2. Alicia Plerhoples

    October 26, 2012 at 4:26 pm

    Kyle –

    IT shocked me to see two major law firms suggesting to state charity officials that they should be regulating benefit corporations and the like. This effort seems to come from those who worry about transparency. Transparency fears are not unwarranted, but I think that solutions should be drawn from the for-profit arena, like the benefit corporation’s statutory requirement to publish an annual benefit report.

    The market for accounting mechanisms to measure social and environmental value is nascent but developing. Just like the Financial Accounting Standards Board (FASB) was created in the 1970s to establish financial accounting and reporting standards to help investors make informed choices, the Social Accounting Standards Board (SASB) (see here: http://www.sasb.org/) has recently launched to create industry-specific social and environmental accounting and reporting standards for all for-profit companies, including social enterprises. This is a step in the right direction to get information about a company’s social and environmental impact into the hands of investors, for-profit regulators, and the public.

  3. […] for the industry, Alicia Plerhoples of Georgetown Law Center has noted some discussion about involving state attorney generals, and I have suggested setting partial asset locks and charitable giving floors for benefit […]

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