Wednesday, September 26, 2018

For-Profit Corporation vs. Nonprofit Corporation vs. Social Purpose Corporation vs. Public Benefit Corporation

If you are interested in forming a corporate vehicle for “doing good,” you may have considered forming a for-profit corporation, a nonprofit corporation, a public benefit corporation, or a social purpose corporation.  But which corporate vehicle is right for you and your cause(s) in Texas? I’m going to compare and contrast these corporate forms for you.

For-Profit Corporation:

A for-profit corporation is exactly what it sounds like – it’s in business to make a profit for its shareholders. Thanks to the magic of the "invisible hand” of capitalism, virtually every successful for-profit corporation will end up doing a lot of good things for its customers, vendors, employees, and other stakeholders. But ultimately the board of directors of a for-profit corporations owes fiduciary duties to seek to maximize profits for its shareholders. That’s true even if the board faces a choice that may be right for its shareholders, but may not be in the best interests of the community, the world, or other stakeholders of the corporation.

So if you want to earn a profit for yourself and impact the world in a positive way by providing great products or services, but with no obligation (or opportunity) to consider stakeholders other than the corporation’s shareholders when making business decisions, the for-profit corporation is probably right for you.

For-profit corporations are governed by Chapter 22 of the Texas Business Organizations Code (TBOC).

Nonprofit Corporation:

Being a “nonprofit” corporation does not mean that the corporation may not earn a profit - it just means that all profits earned by the corporation must ultimately flow to a “good cause” and not flow to the benefit of any individual or for-profit corporation.

Nonprofit corporations are governed by Chapter 22 of the TBOC. Section 22.01(5) of the TBOC defines a nonprofit corporation as “a corporation no part of the income of which is distributable to a member, director, or officer of the corporation, except as provided in Section 22.054.”  Section 22.054 of the TBOC permits non-profit corporations to (1) pay reasonable compensation for services provided, (2) confer benefits to its members in conformity with the corporation’s purpose, (3) make distributions to its members upon winding up and termination as otherwise permitted by Chapter 22 of the TBOC, and (4) make distributions of its income to 501(c)(3) organizations under certain circumstances.

So if you just want to “do good” and don’t care about earning any profits for yourself, a nonprofit corporation might be a great option for you.  But if you want to personally share in any of the profits of the corporation as its founder and owner while helping society or the public at the same time, then you might want to consider another type of corporation.

Also, because non-profit corporations may not distribute profits to its members, they often have a more difficult time raising capital – what venture capitalist wants to invest in a corporation with a 0% chance of earning a profit?!  So if you want to attractive investors (not just donations) to your project, the non-profit corporation will not work for you.

Social Purpose Corporation:

In 2013, the Texas legislature adopted the concept of the social purpose corporation in the TBOC. The social purpose corporation sought to bridge the historical divide between for-profit corporations seeking only financial gain for its shareholder or non-profit corporations seeking only to further a social purpose or cause. Why couldn’t a corporation do both? According to the author of the bill that created the social purpose corporation in Texas, the social purpose corporation was adopted in response to a national movement of social entrepreneurship – “a person or entity who uses entrepreneurial principles to affect change in a particular social purpose or cause.”

A new Section 3.007(d) was added to the TBOC, which permits a for-profit corporation to elect to have a social purpose in addition to its for-profit purpose. That Section also permits a for-profit corporation to include a provision in its certificate of formation requiring the corporation’s board of directors and its officers to consider any social purpose of the corporation in discharging their duties.

A new Section 1.002(82-a) was added to the TBOC to define social purposes as “one or more purposes of a for-profit corporation that are specified in the corporation's certificate of formation and consist of promoting one or more positive impacts on society or the environment or of minimizing one or more adverse impacts of the corporation's activities on society or the environment.  Those impacts may include: (A) providing low-income or underserved individuals or communities with beneficial products or services; (B) promoting economic opportunity for individuals or communities beyond the creation of jobs in the normal course of business; (C) preserving the environment; (D) improving human health; (E) promoting the arts, sciences, or advancement of knowledge; (F) increasing the flow of capital to entities with a social purpose; and (G) conferring any particular benefit on society or the environment.”

And new Sections 21.401(c) and (d) were added to the TBOC to explicitly grant the directors and officers of a social purpose corporation the right to consider any social purposes specified in the corporation’s certificate of formation in discharging their duties to the corporation.

As you can see, the social purpose corporation grants the for-profit corporation and its management the right, but not necessarily the obligation, to pursue social purposes while also pursuing a profit for the corporation’s shareholders.  

Public Benefit Corporation:

In 2017, the Texas legislature adopted the concept of the public benefit corporation, which is kind of a social purpose corporation on steroids. Pubic benefit corporations are governed by a newly created Subchapter S of Chapter 21 (For-Profit Corporations) of the TBOC.

The certificate of formation of a public benefit corporation must (1) identify one or more public benefits to be promoted by the corporation, and (2) include a statement that the for-profit corporation has elected to be a public benefit corporation. Section 21.952 of the TBOC defines public benefit as “a positive effect, or a reduction of a negative effect, on one or more categories of persons, entities, communities, or interests, other than shareholders in their capacities as shareholders of the corporation, including effects of an artistic, charitable, cultural, economic, educational, environmental, literary, medical, religious, scientific, or technological nature.”    

The name of a public benefit corporation may include the words “public benefit corporation,” “P.B.C.,” or “PBC." Otherwise, the corporation must notify any potential shareholder of its public benefit corporation status before issuing any shares of stock.

The public benefit corporation provisions of the TBOC also include many provisions that corporation’s might view as onerous. For example, two-thirds of the corporation’s shareholders must approve (1) a merger with a corporation that is not a public benefit corporation, or (2) an amendment to the corporation’s certificate of formation to remove its status as a public benefit corporation. Also, at least every other year, the public benefit corporation must provide its shareholders a statement which must include (A) the corporation’s objectives in promoting the public benefit, (B) standards to measure the corporation’s progress toward such public benefit, (C) objective factual information based on such standards, and (D) an assessment of the corporation’s success in meeting its objectives.

The public benefit corporation really goes all in on the concept of benefiting the public. Section 21.953 of the TBOC requires the public benefit corporation’s board of directors to manage the corporation “in a manner that balances: (1) the shareholders’ pecuniary interests; (2) the best interests of those persons materially affected by the corporation’ s conduct; and (3) the public benefit or benefits specified in the corporation’s certificate of formation.” That’s quite a balancing act for any board.

Conclusion:

While any of these types of corporations may be right for you or your particular situation, I would note that a social purpose corporation (i.e., a for-profit corporation with a social purpose) would seem to give the corporation the maximum amount of freedom achieve both profit and social purposes without many of the requirements and restrictions applicable to the public benefit corporation.

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