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.
