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PROFIT + PURPOSE

Over the last year, I’ve been lecturing at Harvard Law and Stanford Law about structuring social enterprises for impact. I always have people asking me to see the slides, but have never publicly shared the slides. Today I’m releasing those slides to the public.

This is meant to be an introductory presentation that touches on the possible legal structures for social entrepreneurs. The presentation discusses Corporation, B Corp Certification, Benefit Corporation, Flexible Purpose Corporation, L3C and Nonprofit legal structures. Within each legal structure, the presentation touches on Formation, Management, Taxation and Capital.

Click below to access the presentation. Leave your feedback in the comments section. Thanks!

 

NEW LEGAL STRUCTURES FOR SOCIAL ENTREPRENEURS

Originally posted in Wall Street Journal

BY: KYLE WESTAWAY

You may have noticed the emerging class of “social entrepreneurs” who are creating companies that seek profit but also are devoted to a social purpose, to create long term, sustainable value.

Social entrepreneurs believe a business can be a part of the solution to some of the world’s greatest challenges. It’s this kind of thinking that has given rise to such mission-driven companies as Better World BooksTOMS ShoesD-Light Design and Warby Parker, to name a few.

But, until recently, social entrepreneurs would find themselves in the position of choosing whether to organize either as a for-profit company or a nonprofit organization. The problem was that sometimes a company would be too much of a business to be a nonprofit. Yet, it also might be too mission-driven to be a for-profit.

Fortunately, there are a few innovative legal structures designed for entrepreneurs who are driven as much by mission as money. The cost of using one of these new legal structures will vary depending on lawyer fees, but generally those fees shouldn’t exceed more than $10,000 for a start-up with fewer than 10 employees.

Here’s an overview:

L3C

Ideal for: companies that want to blend traditional capital with “philanthropic” capital, such as from foundations

Available to start-ups in: Vermont, Michigan, Wyoming, Utah, Illinois, North Carolina, Louisiana, Maine and soon in Rhode Island.

The Low Profit Limited Liability Company is a new class of LLC for mission-driven companies.

An L3C offers the same liability protection and pass-through taxation as an LLC. But it must be organized primarily for a charitable purpose – and secondarily for profit. Unlike a traditional nonprofit, it may distribute its profits to owners.

The L3C is designed to attract both traditional investment and a very specific type of philanthropic money called Program Related Investments (PRI). PRI is capital – in the form of equity or debt – from a foundation to a for-profit company that is doing work in line with the charitable purpose of the foundation.

BENEFIT CORPORATION

Ideal for: companies that want to create a measurable positive impact while and providing greater transparency to the public

Available to start-ups in: Maryland, Vermont, Virginia, New Jersey, Hawaii, California and soon New York

The Benefit Corporation is a new class of corporation with a corporate purpose to create public benefit, a broader fiduciary duty and is transparent about its overall social and environmental performance.

By definition, it must operate for the general public benefit – defined as a material positive impact on society and the environment. Every benefit corporation is required to publish an assessment using an independent, third-party assessment tool. To create a material positive benefit, a benefit corporation operates in a manner that not only creates value for the company’s shareholders, but also its community, environment, employees and suppliers.

The structure also calls for a high level of transparency and accountability. Within 120 days after the end of each fiscal year, a benefit corporation is required to publish a “Benefit Report,” which states how it performed that year on a social and environmental axis.

FLEXIBLE-PURPOSE CORPORATION

Ideal for: companies seeking to do good on their own terms

Available to start-ups in: California

The Flexible Purpose Corporation a new class of corporation that creates the maximum amount of flexibility for socially/environmentally conscious companies. It is designed for businesses that want to pursue profit along with a special purpose of its own designation.

The structure allows the designation of a special purpose that the company will pursue in addition to profit. For example, a flexible purpose corporation might be a for-profit developer that has a special purpose of building a public park in each of its developments.

This type of corporation must issue an annual report that is available to the public and provides details on the following: the special purpose; the annual objectives that it has set to achieve its special purpose; the metrics used to gauge the success of the special purpose; how it has achieved or fallen short of the stated objectives; and how much money was spent in furtherance of the special purpose. But it does not require any measurement against an independent third-party standard.

TWO BILLS HEADING FOR THE GOVERNOR’S DESK IN CA

Yesterday marked a big day in California.
As reported here, Assembly Bill 361 (the Benefit Corporation legislation sponsored by Assembly member Jared Huffman) passed the concurrence vote Tuesday in the Assembly and began the enrolling and engrossing process to end up on Governor Brown’s desk this week. (No, it is not technically on the Governor’s desk, but probably will be by the end of the week.)
Yesterday, Senate Bill 201 (the Flexible Purpose Corporation legislation sponsored by Senator Mark DeSaulnier) passed out of the Assembly and headed for its concurrence vote in the Senate (possibly as soon as today).  It will also end up on Governor Brown’s desk by the end of the week.
And just in case folks were still curious about whether this type of legislation is necessary or not, the news stories about CouchSurfing switching from a non-profit to a “for-benefit” corporation should help to dispel the disbelief.  (How long would it have taken them to raise $7.6 million in charitable contributions to scale?)
Now, the question that exists is whether Governor Brown will sign both bills. Or might he choose one?  And that really begs the two questions that I’m asked most frequently as I speak around the state:
Why are there two bills in California?
What are the differences in these two pieces of legislation?
I will answer these two questions over the coming days.
Stay tuned!

 

*Todd is a partner at the law firm of Jones Day, where he founded their Silicon Valley Office and runs their Renewable Energy and Sustainability Practice. The views expressed in this column are solely Todd’s personal views, not the views of Jones Day or its clients, and the information provided as to his affiliation with Jones Day is solely for purposes of identification and may not and should not be construed to imply endorsement or even support by Jones Day of the views expressed herein.

 © R. Todd Johnson, 2011. 

Business for Good.SM is a service mark of R. Todd Johnson. The thoughts, ideas and words expressed in this column are the property of R. Todd Johnson and may not be otherwise used or reprinted without express permission from Todd.
Photo: Rockinelle

FLEXIBLE PURPOSE CORPORATION

The Flexible Purpose Corporation is a new class of corporation, much like a C Corp or an S Corp, which allows the directors of a corporation to pursue broader objectives than the narrow focus of maximizing financial return for shareholders. On February 8, 2011 Senator Mark DeSaulnier introduced the Corporate Flexibility Act of 2011 (SB 201) into the California state legislature. It has not been passed into law yet, but we thought we’d give you a sneak peak of a potential new legal structure for social entrepreneurs.

Existing corporate law dictates that directors of corporations’ sole duty is to maximize shareholder value, which means that every decision of must be made with the goal of increasing the price of the stock. When a director makes a decision that does not maximize shareholder value, he opens the corporation up to a lawsuit from shareholders. This poses a problem for corporations that are seeking a financial return as well as other objectives such as positive environmental, social or community impact. The goal of the Flexible Purpose Corporation is to create a legal structure where profits can be pursued along side broader goals without opening the directors up to litigation.

Below are two key attributes of the Flexible Purpose Corporation.

SPECIFIC PURPOSE

As its name implies, the Flexible Purpose Corporation allows the directors a high degree of flexibility to choose a non-financial purpose that they want to pursue. This purpose is called a Specific Purpose and is defined as:

  1. Any charitable or public purpose that a nonprofit would be eligible to carry out or;
  2. Promoting positive or minimizing negative short term and long term affects of among any of the following:
    • employees, suppliers, customers, creditors;
    • the community and society; or
    • the environment.

A Flexible Purpose Corporation may have one or more Specific Purposes. They must be clearly stated in the Articles of Incorporation and approved by 2/3 of the shareholders.

TRANSPARENT REPORTING

After the Flexible Purpose Corporation has identified its Special Purpose, it must set annual objectives to achieve the Special Purpose. At the end of every fiscal year the Flexible Purpose Corporation must give a transparent account in its annual report detailing the actions taken by the Flexible Purpose Corporation to achieve the Special Purpose objectives. The report must include the following:

  1. Identification of short and long term objectives as they relate to the Special Purpose and identification of any changes made to those objectives in the last fiscal year.
  2. Identification and discussion of material action taken during the fiscal year to achieve the Special Purpose objective, the impact of those actions and the causal relationship between the actions and reported outcomes.
  3. Identification of material action that the Flexible Purpose Corporation expects to take in the short and long term to meet its Special Purpose objective.
  4. Identification and discussion of the process of for selecting metrics used for evaluating success of the Special Purpose objective.
  5. Identification of how much money the Flexible Purpose Corporation has spent to achieve the Special Purpose objectives, as well as a good faith estimate in how much it will spend in the next three fiscal years to do so.

The annual report must be publicly available on the Flexible Purpose Corporation’s website and be published within 120 days after closing the fiscal year.

The Flexible Purpose Corporation is focused on giving companies flexibility to choose how they want their company to pursue profit and purpose while requiring a high level of transparent reporting to ensure that they are taking tangible steps toward achieving that purpose. Should the Corporate Flexibility Act of 2011 be passed into law, social entrepreneurs will have more choice in how to structure their business to do well and do good.

Kyle Westaway is the founding partner at Westaway Law– an innovative New York City law firm that counsels social entrepreneurs. He has helped build Biographe – a sustainable style brand that employs and empowers survivors of the commercial sex trade. Kyle is a Cordes Fellow. He lectures on social entrepreneurship at Harvard Law School and Stanford Law School. He writes for Huffington PostGOODTriple PunditSocial Earth and Law for Change.

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photo: PatrickSmithPhotography

CALIFORNIA’S BOLD MOVE TO LEGITIMIZE SUSTAINABLE BUSINESS

A great post by Joel Makower on The Flexible Purpose Corporation legislation introduced in CA.

A bill introduced in California’s state Senate last week holds enormous potential to give sustainable business a push by making it — well, legal.

Under current law in California and most other states, companies can be sued by their shareholders or investors for taking environmental or social measures that negatively affect shareholders’ financial returns. The proposed bill would enable a new form of for-profit corporation, encouraging and expressly permitting companies to pursue other things besides simply making money.

This is no small matter. The legal issue of fiduciary responsibility has long been seen as a barrier to companies taking more proactive social and environmental measures. In many cases, it has given companies a fig leaf to avoid taking substantive measures to, say, clean up pollution or avoid sourcing from sweatshops. Indeed, the requirement for companies to put profits above all else has been blamed for much of society’s ills — at least the kind allegedly propagated by business. And the alternatives have been a cold cup of tea: to become a nonprofit organization, a hybrid model championed by social entrepreneurs, or some other legal entity frowned upon by capital markets. That pretty much guarantees that these “good” companies are destined to remain small.

For years, groups of socially responsible investors, social and environmental activists, and others have tried to change this state of affairs, with little success. Maryland and Vermont recently enacted measures to allow “for-benefit” companies, such as those advocated by the nonprofit group B Lab, and a few other states are considering them. However well-intentioned, these laws are limited in scope in that they focus principally on smaller, privately held firms.

Getting large publicly held companies to change has been all but impossible, which is why SB 201, the Corporate Flexibility Act of 2011(download – pdf), introduced in California’s State Senate on February 8, is of such significance. It would authorize and regulate the formation and operation of a new form of corporate entity known as a “flexible purpose corporation.”

Under SB 201, “Any company establishing in California will be permitted to negotiate to include a social and environmental mission that is given equal weight, perhaps even greater weight, than profits,” Susan H. Mac Cormac, who co-led a working group that helped draft the bill, told me recently. “We have given additional protection to boards and management if they do that. We also have a metric for shareholders to enforce the social and environmental mission, just the same as shareholder value.” It’s a model, she says, that can be used by both public and private companies.

SB 201 differs from the “for-benefit” statutes in at least one significant way: It doesn’t proscribe what a company must do. The Maryland and Vermont laws, in contrast, spell out the requirements of a “benefit corporation” — a checklist that hews largely to B Labs’ model for sustainable business.

There are good arguments for both approaches. On the one hand, a set of criteria sets a standard for what a company must do to be “beneficial.” On the other, it lets legislators and regulators set those criteria, a process that often ends up muddled or worse. Unfortunately, traditional California corporations are not able to amend their articles to “embed” environmental and social criteria without considerable risk, thereby creating an issue for California corporations seeking “B Corporation” status.

Cormac, who co-chairs the 550-lawyer Business Department as well as the Cleantech Group at the law firm Morrison & Foerster, has been working on these issues for the better part of a decade. As co-chair of the California Working Group for New Corporate Forms, she and a small team spent nearly 18 months deliberating and drafting this proposed new division of the California Corporations Code. Along the way, the group solicited comments from an advisory committee comprised of members of the California legal and communities.

“We have the conservative folks behind us from the chamber of commerce,” she says. “We have a lot of support and have spent a lot of time working with folks to get it right.”

Cormac admits that big corporations aren’t likely to quickly adopt this new legal form should it become law. “The companies that could easily do this are the ones where there’s a really strong link between their profitability and their sustainability — the Methods or Revolution Foods of the world,” she says.

Even if SB 201 passes, it will be just one step in a longer journey to transform mainstream business to pursue environmental and social goals as aggressively as they do financial ones. To gain traction, these companies will need the support — or the demands — of institutional investors, such as large pension funds, embracing flexible purpose corporations. It will take leadership companies, government agencies, universities and other large buyers of goods and services to adopt policies giving procurement preference to these companies. And it may well take preferential tax treatment for flexible purpose corporations, or other policy mechanisms, such as fast-track permitting or reduced oversight.

All of which is only one part of the puzzle, says Cormac. “I’ve looked at every part of the system, and it’s not just corporate structure that ties it to profitability. It’s executive compensation with stock options. It’s the analysts on Wall Street and the quarterly reports, and a whole confluence of factors that lead to this unholy emphasis on shareholder value.”

I asked Cormac how she and her law firm would benefit if SB 201 became law. After all, she heads the corporate division of one of America’s larger law firms.

“This is pro bono,” she says. “We have no skin in this game.” To back it up, she explains that she is working working with law schools at Stanford, Berkeley, and UCLA to establish free legal help for companies that want to set up flexible purpose corporations. “This is a passion, not a business opportunity.”

For now, it’s all about getting this bill passed — it needs to pass the gauntlet of two committees, then the full Senate, then the State Assembly and getting Governor Jerry Brown to sign it. It’s looking good, says Cormac, but we’ve all seen “sure things” blow up at the last minute.

This will take everyone’s best efforts — letters of support and all of the other usual tools of the trade. (You can send letters to Senator Mark DeSaulnier, State Capitol, Room 2054, Sacramento, CA 95814.) And it will take mainstream companies and investors standing up to be counted.

Without such a law, we’ll be stuck with business as usual — companies hamstrung by their legal obligation to put shareholders’ financial returns above all. But if bellwether California can get this passed, it will make it legally possible, once and for all, for companies to truly integrate the triple bottom line.


Joel is co-founder and executive editor of Greener World Media, Inc., which produces GreenBiz.com and its sister sites, ClimateBiz.comGreenerBuildings.comGreenerDesign.com, and GreenerComputing.com. Joel is also the principal author of the annual State of Green Business report and the Greener by Design conference, both produced by Greener World Media.

Joel also serves as a senior strategist at GreenOrder, a sustainability consultancy, as well as co-founder and principal of Clean Edge Inc., a research and publishing firm focusing on building markets for clean energy technologies. From 1991 to 2005, Joel was editor and publisher of The Green Business Letter, an award-winning monthly newsletter he founded on corporate environmental strategy. In 2005, he was appointed a Batten Fellow at the Darden Graduate School of Business at the University of Virginia.

Photo: Flying House Studios

FLEXIBLE PURPOSE BILL INTRODUCED IN CA

Add California to the list of states that is contemplating a new corporate structure that for social entrepreneurs that are seeking to create mission driven for profit companies. On Tuesday, February 8th, The Corporate Flexibility Act of 2011 was introduced into the California Legislature.

The proposed legislation is the first of its kind and is distinct from the Benefit Corporation laws currently on the books in Vermont and Maryland and pending in seven other state legislatures. Stay tuned for a post focusing on the differences in the the two approaches. It should be interesting to see which approach ends up being adopted by the most states in the end.

photo: PatrickSmithPhotography

A NEW ROAD FORWARD

Have you ever tried to organize a social enterprise and find yourself frustrated by your options for legal structure? Well… we know the feeling. As a social entrepreneur and an attorney, I’ve dealt with this frustration both personally and on behalf of my clients.

As a leader of a social enterprise, you are an innovator, but the current structures stifle that innovation. You are forced to chose between two out-moded options: either organize as a for-profit or nonprofit entity, and maybe use some Frankenstein-like techniques to find something that sort of works, but is sub-optimal to say the least. The bottom line is that neither the for-profit not the nonprofit entity addresses the needs of social enterprise.

There must be a new road forward.

Fortunately, there is a group of legal minds around the country that are starting to cut a new road across the U.S. legal landscape. We are creating a new corporate form that will empower social enterprises. This is an exciting time in the social enterprise movement as a whole, but specifically in the legal structures supporting the movement.

This blog is a space dedicated to discuss and disseminate information on the legal structures, both old and new, including Nonprofit, For-Profit, L3C, the For-Benefit Corporation and other emerging legal structures connected to the social enterprise movement. We hope that be aggregating and curating the knowledge about this area of law, social enterprises will have an understanding of all their options, and make decisions that will set them up for success.