Traditionally, directors of for-profit businesses are required to perform his or her duties in a manner that he or she believes is in the best interests of the corporation and its shareholders. This is often referred to as the duty to maximize financial return to shareholders. (Corp. Code § 309(a).) Today, some businesses are interested in more than just maximizing profits, which creates an inherent tension between the fiduciary duties owed to the corporation by its directors and the business operations of the corporation.
To alleviate this tension, Gov. Brown signed legislation into law in October 2011 that established the flexible purpose corporation (changed to the “social purpose corporation” on January 1, 2015)(Corp. Code §§ 2500-3503) and the benefit corporation (Corp. Code §§ 14600-14631.). Although each corporate form is “hybrid”, we are going to discuss the primary difference between the two entities and a commonly asked question regarding the tax advantages of a hybrid corporation.
Public Benefit vs. Special Purpose
First, a benefit corporation is required to create “a material positive impact on society and the environment.” (Corp. Code § 14601(c).) This public benefit is consequently measured by a third party standard that defines, reports, and assesses the overall corporate social and environmental performance. (Corp. Code § 14601(g).)
In contrast, a social purpose corporation must only consider the specific purpose set forth in its’ Articles of Incorporation (as opposed to an overall public benefit resulting from its activities). In other words, a social purpose corporation can prepare a broad or narrow “specific purpose” and focus only on meeting this purpose (rather than satisfy a third-party standard). Similarly, the reporting requirement for each “hybrid corporation” reflects this tension as social purpose corporations are only required to report on their special purpose, whereas the reporting for benefit corporations is focuses on the overall public benefit.
Enterpreneurs are often confused whether these hybrid corporations are for-profit or nonprofit entities. For the purposes of federal and California tax law, both social purpose corporations and benefit corporations are treated the same as traditional for-profit corporations. Neither type of hybrid corporation is eligible for tax-exempt status (federal or state) and nor can either entity offer charitable tax deductions to its contributors.
Despite the obvious reasons these “hybrid corporations” were created, they are still rarely used in the practice of corporate law. If you’re interesting in hearing more about these hybrid corporations, a for-profit business entity, or a nonprofit corporation, contact us today.