ZENSHIP
SUPPLEMENT TO THE PUGET SOUND BUSINESS JOURNAL MAY 20-26, 2011
May 20-26, 2011
New hybrid business entities
m the mailroom
om. New hybrid business entities combine business, social missions
combine business, social missions
CORPORATE CITIZENSHIP
A
A
environmental
transMore than 330and
businesses
have been certified as
SOCIAL
parency
standards
as
“B include financial services
has
a
mission:
to
a successful business, but also to combine
B corporations. These
than investments from nonprofit
launch
a successful
profitability with a broader
societal
purpose. ENTREPRENEURS corporations.”
firms seeking More
to attract
330
businessesgreen
have been
but also
Whether that purposebusiness,
is environmental
endowments,
builders, and even law firms.
certified
as B of
corporations.
to combine
sustainability or fair trade,
it mayprofitability
not alwayswith
be
The drafters
the proposed Washington legislation
These
include financial
a broader
compatible with maximizing
profits.societal purpose.
contemplate
that a social purpose corporation
services
firms
to for certification as a B
Whether
that
purpose
is
enN
That’s where boards of traditional business
would be
ableseeking
to qualify
attract
investments
from
vironmental
sustainability
or
corporations face a dilemma. Sell the company to
corporation.
nonprofit
endowments,
fair trade, it may not always
the highest bidder, or to one that will carry out the
While these new hybrid corporate forms blur
green builders, and even
be compatible with maximizLaVerne
company’s social mission? Corporate boards generally
the line between traditional business corporations
law firms. The drafters of
ing profits.
Woods
have
a
duty
to
maximize
shareholder
value
in
and nonprofits, they are fully taxable entities. Social
TY
the proposed Washington
That’s where boards of
approving a sale or merger. That may mean an
entrepreneurs who hope to attract foundation
legislation contemplate that
traditional business corporaobligation to opt for money
over
mission,
or
face
legal
action.
grants
and
charitable
contributions
corporation
would beshould choose a nonprofit
tions face a dilemma. Sell the company a social purpose
The good news is that to
Washington
businesses
may
soon
have
corporation
with
federal
tax
classification
as a Section 501(c)(3)
the highest bidder, or to one that will able to qualify for certification as a B
another option.
charity,
rather
than
a
hybrid.
corporation.
carry out the company’s social misA Washington State Barsion?
Association
committee
has designed
Another
newnew
hybrid
the low-profit limited liability
While these
hybridform,
corporate
Corporate
boards generally
havea
proposed new corporate form,
called
a “social purpose
company,
is designed
for the limited purpose of
forms blur or
the“L3C,”
line between
traditional
a dutytentatively
to maximize
shareholder
value
corporation,” to provide greater
flexibility
for
social
entrepreneurs
attracting
“program
related
investments,”
or “PRIs,” from private
business corporations and nonprofits,
in approving a sale or merger. That
and boards. The proposal
would
allow
a
Washington
business
foundations.
Vermont,
Illinois,
Michigan,
and other states have
may mean an obligation to opt for mon- they are fully taxable entities. Social
corporation to elect to ey
identify
a specific
social
L3C legislation.
entrepreneurs
who hope to attract
over mission,
or face
legalpurpose
action. in passed
addition to its business purpose.
An electing
corporation
would foundation
The tax law
requires
private foundations
grants
and charitable
contri- to expend 5 percent of
The good
news is that
Washington
be required to carry out
its business
a manner
their
asset
valuechoose
annually
to furthercorcharitable purposes. One way
butions
should
a nonprofit
businesses
may purposes
soon havein
another
opintended to promote positive
a foundation
to meet
payout requirement is to make a PRI.
poration
with federal
taxthis
classification
tion. effects (or minimize adverse for
effects) of its activities on A
itsWashington
employees, State
suppliers,
customers, PRIs
can include
equity
investments
as a Section
501(c)(3)
charity,
rather in for-profit ventures that
Bar Association
than a hybrid.
committee
designed a proposed
the community and society,
and thehas
environment,
rather than further
a charitable objective, such as development of a vaccine
newdeveloping
hybrid form,
the Foundation PRIs are subject to
new corporate form, tentatively called
solely on its shareholders.
forAnother
use in the
world.
low-profit
limited
liability company,
a “social could
purpose
corporation,”
to
A social purpose corporation
change
or eliminate
its strict
tax law
requirements.
As a result, only the largest and most
or “L3C,” is designed
for the
limited
provide
flexibility
socialclass
enspecified social purpose only
withgreater
a two-thirds
votefor
of each
sophisticated
foundations
tend
to make PRIs.
ation.orgof voting shares. This rule
purpose
of
attracting
“program
trepreneurs
and
boards.
The
proposal
is designed to enable entrepreneurs
The L3C form was intendedrelated
to make PRIs a viable option
investments,”
“PRIs,”
from privateAn L3C is a limited liability
wouldmission
allow a Washington
business
to maintain the corporation’s
in its early stages
if new for
a broader or
range
of foundations.
foundations.
Vermont,
Illinois,
Michito elect
a specif& Preschool
investors seek to shift corporation
the company
fromtoitsidentify
original
social company
(LLC)
that has
as its
primary purpose achieving a
gan, andbeneficial
other states
have
passed L3C
socialhave
purpose
in addition
to its
busiCenter purpose. The corporationic
would
to provide
a report
annually
socially
goal.
Generating
a profit is only a secondary
legislation.
purpose.
An electing
corporation
to its shareholders on its ness
efforts
to promote
its social
purpose.
goal.
(The name is a play on 501(c)(3), but the LC3 is not itself a
The tax law requires private foundawould
be required
to introduced
carry out itsduring
busiThe proposed legislation
is expected
to be
charity.)
tions
to expend
5 percentthat
of their
assetin an L3C may in theory
ness
purposes
in
a
manner
intended
to
the 2012 legislative session.
A private
foundation
invests
value
annually
to
further
charitable
promote
positive
effects
(or
minimize
Other states have adopted or are considering similar approaches find it simpler to ensure that its investment will qualify as a PRI,
purposes. One way for a foundation
adverse effects) of its activities on
to address the emerging need for hybrid legal forms that because the L3C statute includes some of the tax law requirements
to meet this payout requirement is to
its employees, suppliers, customers,
combine business and social missions. California is considering for PRIs. The L3C form offers little practical advantage, however.
make a PRI. PRIs can include equity
the community and society, and the
legislation to create “flexible purpose corporations,” similar to Use of the L3C form does not by itself guarantee that a private
investments in for-profit ventures that
environment, rather than solely on its
the proposed social purpose corporation. Maryland and Vermont foundation’s investment will qualify as a PRI. A foundation’s
further a charitable objective, such as
shareholders.
have adopted “benefit corporation”
statutes,corporation
which require
inof
a traditional
LLC
can,
if properly structured, qualify
development
a vaccine for
use
in the
A social purpose
couldthe investment
corporation to create a “material
positive
impact
on
society
and
as
a
PRI
just
as
easily.
developing world. Foundation PRIs are
change or eliminate its specified social
the environment.”
subject to strict tax law requirements.
purpose only with a two-thirds vote of
The benefit corporationeach
legislation
championed
by rule
B Lab, LAVERNE
WOODS
is a partner
at the law firm of Davis Wright
As a result, only
the largest
and most
class ofwas
voting
shares. This
a nonprofit based in Pennsylvania
that
promotes
using
business
Tremaine
LLP
and
the
chair
of
its Tax-Exempt Organizations
sophisticated foundations tend to make
is designed to enable entrepreneurs to
to solve social and environmental
problems.
B
Lab
has
convened
practice
group.
She
has
more
than
20
years of experience in working
PRIs.
maintain the corporation’s mission in
a panel that certifies corporations
that
meet
specificseek
social, with
theL3C
nonprofit
sector.
Reachtoher
at [email protected] or
The
form was
intended
make
its early stages
if new
investors
environmental and transparency
standards
asfrom
“B corporations.”
206.757.8173.
PRIs a viable option for a broader range
to shift the
company
its original
of foundations. An L3C is a limited lisocial
purpose.
The
corporation
would
Reprinted for web use with permission from the Puget Sound Business Journal. ©2011, all rights reserved. Reprinted by Scoop ReprintSource 1-800-767-3263.
ability company (LLC) that has as its
have to provide a report annually to its
primary purpose achieving a socially
shareholders on its efforts to promote
beneficial goal. Generating a profit is
its social purpose.
oundbusinessjournal.com
entrepreneur
social entrepreneur hassocial
a mission:
to launch
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GOOD FOR
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