Entrepreneurs Archives - socentlaw

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

‘TIS THE SEASON… TO INVEST

Thanksgiving marks the beginning of the busiest consumer buying period of the year in the U.S.  This year, however, investors may want to consider spending more time shopping for stock than stuff.  The New Year will bring an increase of 14% in the federal tax rate for many investments – up from a rate of 0% for qualifying investments made on or before December 31, 2010 (yes, that means no federal tax).

And the holiday cheer offered by this potential tax benefit is not limited to outside investors.  Others who may want to consider a change in their end-of-year financial plans include:

  • Entrepreneurs – if you were thinking about forming a company or contributing additional capital to your new business at the beginning of 2011, you may want to accelerate your plans.
  • Option/warrant holders – if you hold vested options/warrants, you may want to evaluate an early exercise of your rights.
  • LLC members – have you been considering a change in form of entity?  Conversion to a corporate form before the end of the year could qualify the stock you receive for tax free treatment on capital gains.

More Details

Under the Small Business Jobs Act of 2010 (signed into law on September 27th by President Obama), there is a 100% exclusion from federal tax for any capital gains realized from certain investments in “qualified small business stock” made between September 27, 2010 and December 31, 2010.  The excluded capital gain for qualifying investments is also excluded for purposes of the alternative minimum tax.  On January 1, 2011, the capital gains rate applicable to qualified small business stock will return to 14%, and gains will no longer be excluded for alternative minimum tax purposes.

Section 1202 of the Internal Revenue Code includes a number of requirements and limitations for this tax benefit, some of which are summarized below.  As the list below is not exhaustive, you should review the details of any proposed investment with an attorney or tax adviser to ensure that it qualifies.

  • The issuer must be a C corporation.
  • The stock must be acquired at original issuance from the issuer (not from a third party or secondary offering).
  • The stock must be held for at least five years.
  • The aggregate gross assets of the issuer (including majority parents and majority-owned subsidiaries) may not exceed $50 million at issuance.
  • The issuer must engage in the active conduct of a “qualified trade or business.”  Examples of businesses that do not qualify include: banking, insurance, financing, leasing, investing, farming, mineral extraction, hospitality businesses, and a variety of service businesses where the principal asset of such trade or business is the reputation or skill of its employees (such as those in health, law, consulting, and financial services).

Questions?

We at Campbell Law Group would be happy to help you evaluate whether or how you might be able to take advantage of this extraordinary opportunity.  In particular, feel free to contact me or Jochem Tans.

This content is provided solely for general informational purposes.  It does not constitute legal advice regarding any specific facts and circumstances, and its dissemination does not create an attorney-client relationship.   If you are interested in learning more or want to discuss a particular situation, you should contact one of us or another attorney or tax adviser.