Q&A on California's Proposed "Flexible Purpose Corporation"

Yesterday, the California Senate Committee on Banking and Financial Institutions met to review SB201- a bill that would create a new form of corporation for social benefit known as the "Flexible Purpose Corporation."

To better understand the legislation, we chatted with one of its co-drafters: Will Fitzpatrick, General Counsel of the Omidyar Network.

 

TriplePundit: Okay, first the basics:  What is a Flexible Purpose Corporation, and what does this legislation hope to achieve?

Will Fitzpatrick: We are trying to make it easier for companies to include social and environmental goals in their business plans.  This legislation creates a new corporate form that helps them do just that.  Currently, officers of publicly held for-profit corporations face liability for pursuing any social benefit goals that might be seen as conflicting with the maximization of profit or shareholder value.  Entrepreneurs who choose to incorporate under this new form avoid this liability so long as they are transparent with their investors about their goals.  The bill will make it easier for for-profit social entrepreneurs to find commercial funders, and will help them to ensure their company stays on mission.

3p: Why should we care about this legislation?

WF: Tax code shouldn’t be the primary driver of business plans. There are plenty of viable opportunities to create profitable business that are also mission-driven.  But because the law doesn’t know how to deal with these kinds of organizations, social entrepreneurs pursuing market-based models are forced to jump through needless, costly hoops just to go about their daily work.

What we’ve got now is senseless bifurcation. You can either structure yourself as a for-profit business or a tax-exempt non-profit.  If you’re a non-profit, but you generate income, you constantly have to worry about losing your tax-exempt IRS status.  What’s more, because non-profit capital is limited, it makes it harder for you to scale.

If you’re a for-profit that wants to pursue social good, current structures don’t help you either.  Currently, the ambiguity of doing good while making profit makes it harder to raise money for your business.  And because the law actually requires businesses to place profit first, mission drift is a constant danger.

3p: Why does the Omidyar Network care about this issue?

WF: We make investments in both for-profits and non-profits that pursue social good.  Not only do we see our investees spend extra time and money to figure out how to structure hybrid organizations—we ourselves deal with these unnecessary transaction costs.

For example, if we use our foundation money to invest in a for-profit, we have to seek outside counsel to make sure we’re complying with tax code—which costs as much as 60,000 dollars per deal.  Luckily, we’re able to absorb these costs, but many organizations aren’t, which means less capital is available for social good.

This legislation is not a silver bullet, but it will certainly help in many cases.

Is this the same as the “Benefit Corporation” legislation that has passed in other states?

WF: This is a complementary, but slightly different, approach to the issue.  The Flexible Purpose Corporation is focused on changing the structural problem.  It alters the fiduciary obligation of corporate trustees so that they no longer risk lawsuits when they incorporate social or environmental goals into their business strategies.  This legislation also casts a wide net so that all types of companies can have the legal freedom to incorporate more than a single bottom line.

3p: What can we do to help?

WF: Your support makes a huge difference.  Call or email the California Senate Committee on Banking and Financial Institutions to encourage them to pass the bill (SB201- The Corporate Flexibility Act of 2011):

(916)651-4102 or Eileen dot Newhall at senate dot gov.