The “Social Purpose Corporation” passes the Washington State House of Representatives

As we’ve previously explained on this blog, several states have adopted legislation accommodating legal structures for businesses that make a social impact.  For example, Maryland, New Jersey, Hawaii, Vermont, California, New York, and Virginia and have passed statutes authorizing Benefit Corporations.  And Illinois, Louisiana, Maine, Michigan, North Carolina, Rhode Island, Utah, Vermont, Wyoming have passed legislation authorizing the Low-Profit Limited Liability Company (or “L3C”).   Both the L3C and the Benefit Corporation structure are often referred to as a “hybrid entities” because these legal structures blend nonprofit and for-profit principles—the businesses are required to adhere to a social mission but are permitted to make a profit for the businesses’ owners.

For those of you here in Washington State, you’ve no doubt wondered: are we not sufficiently progressive to have such a corporate structure to accommodate our social entrepreneurship community?  When will Washington catch up and allow a hybrid entity form?

Turns out, the time is now!  Yesterday, the Washington State House of Representatives approved SHB 2239, which would authorize the “Social Purpose Corporation” here in Washington State.  Interestingly, those who make the proverbial sausage in our state have actually been considering a new entity for social enterprises for quite some time.  In the spring of 2011, a committee of the Washington State Bar Association put its stamp of approval on the “Social Purpose Corporation” as the best choice for a hybrid structure.  Attorney Lavern Woods explains that process here.  Because it was too late for the Washington State Legislature to consider the new legal structure at that time, legislation for the Social Purpose Corporation had to wait until January of this year for its introduction.

Keep in mind that the State Senate and Governor still have to sign off on the bill.  But in a legislative session that will again be dominated by budget concerns, I’m fairly confident that this legislation (costing the State virtual nothing to implement) will pass.  We’ll be sure to keep you updated on the bill’s process.

The Social Purpose Corporation

At its core, like other hybrid entities, the Social Purpose Corporate structure allows founders and owners of the business to take action to further a stated social mission of the company, even if the action would come at the expense of profits.  Otherwise, the Social Purpose Corporation mostly looks and acts like a traditional corporation—the unit of ownership is stock shares and the company is authorized to make a profit.

Three requirements from the legislation merit additional mention.

First, the Social Purpose Corporation must include a social purpose in its formation documents (the articles of incorporation).  The articles of incorporation for the company must explain that the organization is formed to create a general social benefit to:  (1) the corporation’s employees, suppliers, or customers; (2) the local, state, national, or world community; or (3) the environment.  And if so inclined, founders may set forth additional specific social purposes for which the corporation is created.

Second, the board of directors of a Social Purpose Corporation is required to issue an annual social purpose report to its shareholders.  The report must include a narrative description of the efforts that the company undertook to further its social goals, and the report must be made available to the public.

Third, current Washington corporations can choose to become a Social Purpose Corporation under the bill.  The Board of Directors first vote on electing to become a Social Purpose Corporation, and then the Board submits the proposal to the shareholders for a vote.  After shareholder approval, all that is required is a filed amendment to the corporation’s articles of incorporation (to comply with the social purpose requirements above) and the business becomes a Social Purpose Corporation.

The House of Representatives provides a handy summary of the bill here.

Here’s hoping that Washington becomes the latest state to accommodate a legal structure for its social entrepreneurs!

The article provided above is for general information purposes only and should not be relied on as specific legal advice. This article does not form an attorney-client relationship. If you have any questions about this article, please feel free to contact Peter J. Smith at peter@apexlg.com

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