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What is a California Social Purpose Corporation?

What is a social purpose corporation? Why would a company choose to adopt it?

Many companies are now pursuing both returns for investors and attempting to achieve other special purposes. As a result, you may recall,[1] two bills were passed in 2011 creating for-profit legal entities in California that also aimed to create a positive social impact. One was the benefit corporation, and the other was the flexible purpose corporation.

(Both are like traditional for-profit corporations with the addition that these corporations are organized to provide social benefits that they describe in their by-laws.)

Back on September 27, 2014, Governor Brown signed into law an amendment to the Corporate Flexibility Act of 2011. This division is now to be known and cited as the Social Purpose Corporations Act. The amendment, Stats. 2014, Ch. 694, Sec. 13 (S.B. 1301), changes existing law (found under Corporations Code Sections 2500-3503) to emphasize the social-purpose nature of the flexible purpose corporation, most notably by changing its name to the “social purpose corporation (SPC)” effective
January 1, 2015.[2]

The SPC is designed to provide companies flexibility to pursue charitable and public purpose activities, beyond profit maximization. With the law change directors are now required to take company mission into account in decision making. In its previous form, a company’s directors were permitted to take a company’s ‘special purpose’ or mission into consideration. In the amended language directors of a SPC are required to consider and exercise discretion to further the corporation’s special “social purpose.” A good way to think about the SPC is as a modified form of the traditional corporation. With respect to some important features, the SPC and traditional corporation are the same: both entities are taxed the same and SPCs follow the same general corporation laws.

The difference is a SPC is required to specifically state in its articles of incorporation that it is organized as a SPC under the Social Purpose Corporations Act. In addition, a SPC must state that it has a specific purpose to pursue a public purpose that a traditional nonprofit corporation would normally have pursued. A SPC may dedicate its special purpose to promote short-term or long-term beneficial effects of the SPC’s activities on the SPC’s employees, suppliers, customers, creditors, the community and society, or the environment.  

California benefit corporations have a higher bar for social impact measurement and reporting, among other differences, specifically, SPCs don’t have to meet a “general public benefit” that has a “material positive impact on society and the environment,” as benefit corporations do. Instead, they can pursue “special purpose” activities that have a public benefit.

The terms “social purpose corporation” and “benefit corporation” are sometimes misleading and some people are confusing these corporations with nonprofit organizations. This leads people to mistakenly think that these corporations are tax-exempt nonprofit organizations.

Benefit corporations and SPCs are for-profit organizations and therefore do not qualify for tax-exempt status as a nonprofit corporation under Revenue and Taxation Code Section 23701.[3] These types of corporations follow the business structure for a
C corporation. 

Both SPCs and benefit corporations require businesses to identify and state their general social or environmental benefits with the option of one or more specific social purposes that are unique to the company and to produce an annual report in which they document progress on these goals.

Within 120 days after the end of each fiscal year, a benefit corporation is required to publish a benefit report, an assessment of the overall social and environmental performance of the benefit corporation. The benefit corporation is held to a third party’s independent assessment that measures social and environmental impact. The benefit corporation has to then share this assessment of its performance publicly, a benefit corporation is required to post all of its benefit reports on the public portion of SPC’s website, if any, which increases transparency and accountability.

Although the SPC must also cause an annual report to be sent to the shareholders not later than 120 days after the close of the fiscal year that includes a management discussion and analysis (special purpose management discussion and analysis) concerning the social purpose corporation’s stated purpose or purposes and make the special purpose management discussion and analysis publicly available by posting it on the SPC’s website, the SPC doesn't have to go through the auditing. (This is something a start-up may not want to pay for.)

[1]See our October 2014 TaxNews article, Just what is a “Flexible Purpose” Corporation or a “Benefit” Corporation or a “B” Corporation?
[2]Existing flexible purpose corporations are not required to change their names or the content in their Articles of Incorporation to comply with these statutory changes.
[3]Note: California nonprofit, nonstock corporations organized for religious, charitable, social, educational, recreational, or similar purposes are formed pursuant to the Nonprofit Corporation Law. California nonprofit corporations are not automatically exempt from paying California franchise tax or income tax each year. A separate application is required in order to obtain tax-exempt status. For more information, go to our Charities and Nonprofits (Exempt Organizations) webpage.

Back to September 2015 Tax News

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