All posts in Social Purpose Corporations

Does An SPC Have to Give Money To Charity?

Does An SPC Have to Give Money To CharityI had a prospective client call me the other day. She was thinking that in order to be a Social Purpose Corporation the corporation would have to pay a certain amount of money to charity each year.

There is no such requirement.

There a number of things SPCs have to do, but giving money to nonprofits or charities isn’t one of them.

What Must SPCs Do

  • They have to have Articles of Incorporation that conform to the SPC statute (RCW 23B.25).
  • They must be organized for a general social purpose (See RCW 23B.25.020). An SPC could also elect to have an additional special social purpose (See RCW 23B.25.030), which could be, for example, to donate a certain amount of money to charity.
  • They must have “SPC” or “Social Purpose Corporation” in their name.
  • Before issuing shares, they must give a copy of their Articles of Incorporation to the recipient of the shares.
  • They must put a special legend on their stock certificates (See RCW 23B.25.070).
  • They must issue to shareholders, by making publicly available on the company’s web site, a social purpose report (See RCW 23B.25.150).

So, unless my prospective client voluntarily elects in its Articles of Incorporation to require the company to make charitable contributions, the closest thing to giving money to charity each year is the requirement to issue the social purpose report.

The Social Purpose Report

This report has to include a narrative discussion concerning the social purpose or purposes of the corporation, including the corporation’s efforts intended to promote its social purpose or purposes.

So, an SPC could give a certain amount of money to nonprofits or charities each year, and report in its social purpose report that it made these gifts in an effort to promote its social purposes, but it wouldn’t have to do this. It could, if it wanted, spend the money directly in furtherance of its purpose.

For example, suppose the SPC adopted the general social purposes in the statute. Those are:

to promote positive short-term or long-term effects of, or minimize adverse short-term or long-term effects of, the corporation’s activities upon any or all of (1) the corporation’s employees, suppliers, or customers; (2) the local, state, national, or world community; or (3) the environment.

To advance its social purpose, for example, each year the corporation could devote some percentage of its profits directly to environmental clean up. Or it could commit to contribute that percentage of its profits to a charity or charities that engage in such efforts. In either case, it could undertake these actions rather than reinvesting the profits in expanding the business or improving profitability or paying dividends to shareholders—all in order to promote the positive short-term or long-term effects of, or minimize adverse short-term or long-term effects of, the corporation’s activities on the environment.

Direct spending on environmental cleanup, or making charitable contributions to do so, rather than or in addition to shareholder distributions would be a completely legitimate corporate action on the part of the SPC, and a shareholder would have no ground to complain–even if the Board of Directors of the SPC decided to forego shareholder dividends in their entirety and spend all of the corporation’s distributable cash in furtherance of such pursuits, as long as the Board reasonably believed such an action would promote the social purposes of the corporation.

Why would a director have little to worry about in this situation? Because the SPC statute (RCW 23B.24.050) provides, in part, as follows:

(2) Unless the articles of incorporation provide otherwise, in discharging his or her duties as a director, the director of a social purpose corporation may consider and give weight to one or more of the social purposes of the corporation as the director deems relevant.

(3) Any action taken as a director of a social purpose corporation, or any failure to take any action, that the director reasonably believes is intended to promote one or more of the social purposes of the corporation shall be deemed to be in the best interests of the corporation.

(4) A director of a social purpose corporation is not liable for any action taken as a director, or any failure to take any action, if the director performed the duties of the director’s office in compliance with this section.

Conclusion

SPCs are extremely flexible business entities that provide significant protection to directors in making business judgments. They also allow a company to bind itself in advance to a level of required commitment by adopting third party standards against which its success in satisfying its the social purposes is measured. At the same time, however, they allow a company, if it wishes, to be more flexible and fluid in its approach and not commit itself in advance to measure its effectiveness in satisfying its social purposes against any such performance standards. In either case, the SPC statute provides a venue, through the social purpose report mechanism, for each of the constituencies of the corporation and the public at large to evaluate, comment and provide feedback to the corporation on how the corporation is doing in advancing its social purposes.

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Taxation of Social Purpose Corporations

Question:

I received the following question from a CPA friend the other day:

“I have a client that recently formed a Washington social purpose corporation. Do you have a sense of how SPCs are characterized for federal income tax purposes?”

Answer:

For tax purposes, Washington social purpose corporations are just a type of Washington for profit corporation, formed under the Washington Business Corporation Act, RCW 23B. There is no difference in federal or state tax treatment between an SPC and a regular for-profit corporation.

Accordingly, for federal tax purposes, SPCs are generally treated as ordinary C corporations, which are subject to corporate income tax. If they have only one class of stock and fewer than 100 shareholders, and otherwise qualify, they may elect to be classified as S corporations, which pass gross income, deductions, and losses through to shareholders.

SPCs, like other corporations, can’t be classified as partnerships. Similarly, because SPCs may distribute earnings to shareholders and use assets for shareholders’ benefit, they can’t generally qualify for tax-exempt status (such as Section 501(c)(3) or 501(c)(4) status).

For Washington State tax purposes, SPCs are taxed just like any other type of business entity. They are subject to the business and occupation tax, regardless of whether they are considered C corporations or S corporations for federal tax purposes; Washington does not recognize pass-through companies. They are also liable for sales tax on both sales and purchases, as well as property taxes, in the same manner as other Washington businesses.

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Social Purpose Corporations: Reports

Social purpose corporationIf you are a social purpose corporation, don’t forget about your annual social purpose report.  Under RCW 23B.25.150, social purpose corporations have to file a report annually, reporting on how they are doing.

The Social Purpose Corporation Statute, RCW 23B.25.150 (the “SPC Statute”), provides as follows:

“The board of directors of a social purpose corporation shall cause a social purpose report to be furnished to the shareholders by making such report publicly accessible, free of charge, at the corporation’s principal internet web address, not later than four months after the close of the corporation’s fiscal year, and such reports shall remain available on that web site through the end of the corporation’s fiscal year.”

Timing

For companies whose fiscal years are the calendar year, reports should go up no later than April 30.

Contents

The social purpose report is required to include a narrative discussion concerning the social purpose or purposes of the company, including the company’s efforts intended to promote its social purpose or purposes.  It may include the following:

  1. Identification and discussion of the short-term and long-term objectives of the company relating to its social purpose or purposes;
  2. Identification and discussion of the material actions taken by the company during the fiscal year to achieve its social purpose or purposes;
  3. Identification of material actions that the company expects to take in the future with respect to achievement of its social purpose or purposes; and
  4. A description of the financial, operating, or other measures used by the company during the fiscal year for evaluating its performance in achieving its social purpose or purposes.

No Need to Measure and Report Performance Against Third Party Standard

The Washington legislature, when it adopted the SPC statute, expressly chose a permissive and flexible model rather than a prescriptive one.  Thus, SPC shareholders have the choice whether to include in the SPC’s articles of incorporation that the corporation must furnish an annual assessment of the overall performance of the corporation with respect to the achievement of its social purposes, measured against a third-party standard.  This is an example of the flexibility that the SPC statute affords, ranging from certified “B Corps” that measure the SPC’s performance against a third party standard like the standard established B Lab, the sponsor of the certified B Corp, to those that desire a different model.In other words, in Washington, SPCs may, but are not required to, measure their annual performance against a third party standard.  The statute says:

“the articles of incorporation of a social purpose corporation may contain … [a] provision requiring the corporation to furnish to the shareholders an assessment of the overall performance of the corporation with respect to its social purpose or purposes, prepared in accordance with a third-party standard;”

Theory Behind the Social Purpose Report

The theory behind the annual social purpose report is that, through posting on the SPC’s website, the report will provide a meaningful measure of transparency and communication to the SPC’s shareholders and other stakeholders with respect to the decision-making and actions of directors and officers.  The report must include a narrative discussion concerning the social purpose, including the corporation’s efforts intended to promote its social purposes.  If the corporate has adopted a third party standard against which its performance must be assessed, the corporation may include the annual assessment in the report.

Failure to Perform

The failure to furnish shareholders a social purpose report does not affect the validity of any corporate action.

Conclusion

Companies should take care and time to prepare their annual reports, especially since they are going to have to post these reports on their web sites.

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