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What are the differences between an S-corp and Social purpose corp. in regards to liability of the director/employees, taxes..

Bellevue, WA |

Can social purpose corp accept donations?
How would company write offs work for Social purpose Corp?

What and who is taxed in a SPC?

Does the founder/director of an SPC get paid directly from the SPC like an employee and treated as a separate entity---- like in an S-corp.

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Attorney answers 3

Posted

If you are able to contact an attorney familiar with "social purposes" companies, so called L3Cs, you will find that these actually serve no purpose that was not equally served by an ordinary LLC. The "inventors" of this company concept have sold a bill of goods to some elements of the public, which boils down to making it look like they have special, unique value when in fact they do not.

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Peter J Smith

Peter J Smith

Posted

I would disagree that there isn't any unique value in the L3C, but I am an attorney very familiar with social purpose companies and I can verify that, from a legal standpoint, this is correct. An LLC can be organized to achieve all of the goals the L3C was invented to pursue. Where I disagree is marketing. Foundations are beginning to learn about the L3C and may (eventually) feel better about making program related investments into these structures.

Posted

I am not sure if the previous poster is familiar with Washington's new social purpose corporation. (It appears he practices in Illinois) Just two weeks ago a new law became effective in Washington authorizing social purpose corporations. A key difference between Washington's SPCs and the low profit limited liability company (L3C) is that Washington's SPCs are corporations as opposed to a limited liability company. An LLC is owned by members and operated by members or managers. A corporation is owned by shareholders, and has a board of directors that sets policies and elects officers to conduct corporate business. LLCs are more flexible and can be structured in a number of different ways. Corporations have more formalities, which can be restrictive, but which can also be appealing to some, including investors.

Social purpose corporations, like any businesses, can accept donations. However, SPCs are not non-profit corporations, and it is my understanding that they will be taxed like regular corporations (S or C depending on the election you make). Just like an S corp or a C corp, the founder of an SPC can be paid as an employee or can be paid through dividends.

The main difference between SPCs and traditional corporations, revolves around director liability. Directors of for profit corporations have a duty to act in the best interest in the corporation. This duty has been interpreted as a responsibility to maximize the financial returns for shareholders. If corporate directors take actions that promote a general social purpose at the expense of financial returns for shareholders, they may risk liability for breach of their duties to the corporation. The SPC legislation makes it clear that directors of SPCs can take actions that promote a general social purpose–even if it negatively impacts financial returns for shareholders.

If you want to learn more about SPC's you can check out some of the articles I've written on them:

Linscott Roberts Hanson

Linscott Roberts Hanson

Posted

You are correct, I didn't know of this new entity. Do you feel it has more practical use than the L3C, and if so, in what way? I do understand the fiduciary duty problem for directors, but I'm having a hard time understanding how this new type of corporation would be used.

Peter J Smith

Peter J Smith

Posted

This corporate form does have more practical use than the L3C. I'm seeing more and more entrepreneurs attempting to solve a social problem via business. Oftentimes, a business idea would not fit squarely within the confines of a 501c3 tax exemption, and the risk of capitalizing a nonprofit corporation only to be denied exemption by the IRS is too high for many entrepreneurs. With some creativity, many of my client's goals could be met with traditional corporate forms, but not all of their goals could be met this way, including succession planning. How can they ensure that their corporation will adhere to their social/personal mission upon the founder's exit (retire, die, sell)? This is just one example of the inherent value in the SPC structure.

Kyle Stephen Hulten

Kyle Stephen Hulten

Posted

Linscott, I do think SPCs have more utility than L3Cs because SPCs provide a new option for entrepreneurs. I agree with you that from a legal standpoint L3C's don't add anything. But I also agree with Peter that from a marketing standpoint the L3C may be an attractive option. The SPC is actually an entity with practical legal differences from existing entities, primarily in the department of director liability. Additionally, there are some requirements that may make the SPC more meaningful than an L3C. For example, an SPC must be organized in a manner intended to positively affect one of three general constituencies including (1) the corporation’s employees, suppliers, or customers; (2) the local, state, national, or world community; or (3) the environment. In addition to a general social purpose the corporation may also be operated for one or more specific social purposes. The SPC would have to furnish to shareholders and publish on its website an annual report describing the corporation’s actions to further the social purpose.

Posted

Kyle's answer is very strong, I'll write to clarify.

A social purpose corporation is a for-profit, stock ownership corporation. SPC's take action through a board of directors and are required to have some officers. In fact, the recently effective legislation explains that Washington's business act, RCW 23B governs social purpose corporations except for the few differences mentioned in the act. Kyle has mentioned the differences and provided some resources to identify them, but otherwise think of the SPC as a traditional for-profit entity.

An SPC (like a traditional corporation) is not a tax-exempt entity; therefore, it can accept donations (gifts) but these are not tax deductible for the gift givers and the corporation should book such gifts as taxable revenue. The federal government will view an SPC like a traditional corporation (default tax liked a C-Corp but if structured properly taxed as an S-Corp).

So to your final question, yes--the directors and officers of an SPC are treated like employees and the business may elect an S-Corp tax status.

Some additional resources can be found here: http://www.apexlg.com/index.php/blog/
And the actual legislation found here: http://apps.leg.wa.gov/documents/billdocs/2011-12/Pdf/Bills/Session%20Law%202012/2239-S.SL.pdf

Legal disclaimer: The answer provided above is for general information purposes only and should not be relied on. This answer does not form an attorney-client relationship. You should consult with an attorney of your choice to fully advise you about your legal rights and obligations

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