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Social Purpose Corporation Primer

Posted by attorney Eric Camm

The number of people interested in forming Social Enterprises — businesses that choose to make a social impact in addition to making a profit— is growing across the United States. On June 7, 2012, Washington State joined the movement by making the social purpose corporation (“SPC") available to its entrepreneurs and business community (codified at Chapter 23B.25 RCW). The SPC corporate structure permits company management to take into account stated social purposes, along with or at the expense of profits, when taking action on behalf of the company. Other than a few additional requirements mentioned below, the SPC is a for-profit business entity that is governed by the same rules and regulations (and, for now, taxes) as a traditional for-profit company.

What’s notable about the SPC structure is its flexibility. SPC founders enjoy wide latitude as to how they will operate their social enterprise. While the law does have several requirements for forming and operating a social purpose corporation, as explained below, the requirements set a low bar that is easily met.

1.Social Purposes: The Principal (and Principle) Requirement

The articles of incorporation for the company must explain that the organization is formed to create at least ageneral social benefit to one (or more) of the following: (1) the corporation’s employees, suppliers, or customers; (2) the local, state, national, or world community; or (3) the environment. And if so inclined, founders may set forth additional specific social purposes for which the corporation is created. Specific social purpose is undefined in the statute, entrepreneurs are free to create a specific social purpose to which their company is bound.

2.Annual Social Purpose Report: The On-going Requirement

An SPC’s board of directors is required to issue an annual social purpose report to its shareholders. The report must include a narrative description of the efforts the company undertook to further its social purposes, and it must be made available to the public (via the company website or upon request). Of course, the directors may add additional information into this report if they so choose.

  1. Anchoring Social Purposes and How Established Washington Corporations can Become a SPC

Once chartered, the SPC’s social purposes cannot be materially altered without at least a two-thirds majority vote by the SPC’s shareholders (the two-thirds threshold anchoring the SPC’s social purposes may be increased upon formation). This shareholder right extends to any attempt to merge or otherwise sell the SPC. Finally, a currently organized traditional Washington corporation can become an SPC if two-thirds of that corporation’s shareholders vote to become an SPC, and all other requirements are met.

So, from a legal primer and obligation perspective, 1 through 3 above about covers it. But I want to make it clear that the SPC form and legislation is meant to be a blank slate that founders can write upon think of the legal requirements as the ground floor from which you can build up from. Think that the form should have more teeth and impact measurement requirements? Then consider becoming B-Corp certified, and bind your corporate to such standards. Think that a 2/3 anchor is not enough? Great! Write in to the company’s articles of incorporation that 3/4 of shareholders (or more) must agree before impacting the social purpose of the SPC.

Of course, as your thinking about how to write upon the blank slate that is your SPC, be sure to consult with your legal counsel about whether the SPC is an appropriate form for your company and what effects altering your articles of incorporation will have on long-term planning and growth.

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