Foundry Law Group Blog

Social Purpose Corporations: Beyond the Profits

Social Purpose Corporations (SPC) are an interesting and (relatively) new corporate form available in Washington State that gives directors and officers the luxury of exploring ways to positively impact their employees, community, and environment, with less fear of repercussions via legal action from angry shareholders.  If you are starting a company that has one of these aforementioned goals in mind, then the Social Purpose Corporation structure may be right for you. While the benefits of becoming an SPC seem clear, the drawbacks are a little less easy to see.


A SPC, in a nutshell, is functionally similar to traditional corporations, with one important distinction; to whom directors and officers owe their duty. Conventional corporate structures require that directors and officers of corporations make decisions and act: 1) in good faith; 2) reasonably; and 3) in the best interest of the corporation. SPCs replace this third prong, and instead, allow directors and officers to act while taking into account any or all of: 1) the corporation’s employees; 2) the local, state, national, or world community; or 3) the environment.


This subtle change has a few ripple effects. The first, and most impactful effect is that managers of SPCs can steer their entity towards results or outcomes that might not directly increase shareholder value, but that serve the community, environment, or its employees.  To be clear, SPCs are still for-profit machines, but are now untethered from the responsibility of only focusing on increasing shareholder value.


For shareholders in an SPC, this could be worrisome. While the articles of incorporation of an SPC must state unequivocally that it is, in fact, a SPC, and which social purpose(s) it serves, there is no requirement to describe the relationship between pursuits of profit vs. the pursuit of the social purpose(s). While these are not necessarily mutually exclusive, they do stem from different motives.  This lack of certainty makes it difficult for shareholders to predict what kind of return they can expect.  And to make matters worse for the shareholder, bringing suit against directors and officers for mismanagement of a SPC is trickier, given that, legally, directors and officers can make diverse decisions, choosing not to maximize shareholder value if need be.


On the other side of the coin, SPCs are also not subject to an external audit confirming that they are, in fact, acting in accordance with their designated social purpose.  So in reality, SPCs can seemingly exist without acting any different than traditional corporations (i.e. maximizing shareholder value).  Instead, the SPC structure gives protection to directors and officers, if they choose to steer the corporation in the direction of its designated social purpose.


The takeaway here is that SPCs provide directors and officers added protection if they choose to pursue other objectives than just profits.  While beneficial for the manager, shareholders likely won’t have the same enthusiasm, unless they share similar motives of pursuing the interests of employees, the community, or the environment as specified in the articles of incorporation.  For the entrepreneur wondering whether a SPC would deter future angel or private equity financing, remember that the corporate form can be changed at any time.

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