Setting up a socially conscious business? It Pays to Choose the Right Structure

Business.com / Starting a Business / Last Modified: June 27, 2017
Photo credit: create jobs 51/Shutterstock

If you’re considering starting a business as either a benefit corporation or social purpose corporation, this guide will clear up any confusion so you're on the right track.

Can you tell a benefit corporation apart from a social purpose corporation? Unless you’ve incorporated your business as one of the two entities, you might think they’re more or less based on the same principles. The truth is while both share some similarities, they also have subtle differences that set them apart.

If you’re considering starting a business as either a benefit corporation or social purpose corporation, this guide will help clear up any confusion so you know you're on the right track.

Flexibility

The biggest difference between benefit corporations and social purpose corporations is the amount of flexibility available to both entities. Benefit corporations adhere to what is known as a "triple bottom line," where the business generates profits for shareholders while also helping to solve environmental and social problems. As such, the triple bottom line is a requirement in benefit corporation laws. These laws protect directors and how they run their benefit corporations, but at the same time they do not offer much flexibility or allow for priority on certain factors when making decisions.

Legally speaking, this is generally not the norm for corporations. Typically, directors aren’t restricted on what they can do or required to do things to avoid getting in trouble with shareholders. Enter the social purpose corporation, which offers directors the flexibility to weigh in on more factors than just profits in the decision-making process. This is what is known as a permissive law, allowing directors to keep their power while taking action and making choices that they find to be most suitable.

Purpose

As mentioned earlier, it's easy to think that benefit corporations and social purpose corporations are about the same since they are both for-profit entities that want to make an impact and do good in the world. Once again, benefit corporations are more rigid than social purpose corporations when it comes to their purpose. Here’s the lowdown on what differentiates the pair:

  • Benefit Corporations: At an individual level, benefit corporations are required to meet high standards for social and environmental performance, legal accountability and public transparency while utilizing business to solve problems that impact the environment and community. These entities typically serve the general public benefit.
  • Social Purpose Corporations: Here, more than one social purpose may be designated. In the state of California, these may include purposes that benefit the community, the environment, or the corporation’s customers or employees. They can also include charitable activities. These purposes may also be considered for management decisions and the annual report, but there’s no requirement to release those reports publicly.

Location

Finally, it may surprise you to hear that not all 50 states have embraced these entities just yet. Before you opt to incorporate as one, it’s important to note whether or not their legislature has been passed in your designated state. Over half the country has passed benefit corporation legislature in 33 states with six more currently in the process. While social purpose corporations are still taking more time to catch on, two of the biggest states where they have been embraced include California and Washington State. Keep checking in on a regular basis to see whether or not your state might adopt a benefit corporation and/or social purpose corporation.

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