Most of us are familiar with the various choices for the type of business entity. Traditionally there have been proprietorships, general partnerships, limited partnerships and corporations. About 25 years ago limited liability companies (LLCs) were added and they have been a very popular choice.
In 2012, the Washington State legislature provided us with two new alternatives. One is the Social Purpose Corporation, which is covered below. The other is a limited liability limited partnership or LLLP.
LLCs proved so popular because they are (usually) a pass-through entity for tax purposes and no member has to have personal liability. Remember, even in a limited partnership, there must be at least one general partner who has personal liability.
In response to this, the LLLP statute has allowed for a type of limited partnership with no requirement for a general partner; all partners have limited liability. What is the advantage of an LLLP compared to an LLC? Typically, nothing. But if a company has foreign owners, the foreign tax laws may not recognize an LLC as a flow-through entity. For example, Canada treats LLCs and S Corporations from the U.S. like they are C Corporations. Thus, a member in an LLC can’t use tax losses passed through from a U.S. LLC when filing their Canadian personal tax return. However, partnerships, including limited partnerships, are treated as pass-through entities for Canadian tax purposes. LLLPs are so new that it isn’t clear whether Canadian taxing authorities will treat them as limited partnerships or corporations. But this appears to be a good alternative for foreign investors in the U.S.
What is a Social Purpose Corporation?
Washington’s Version of the New Social Hybrid
The Washington State legislature passed a law on March 30, 2012, allowing for a new type of for-profit corporation, known as a Social Purpose Corporation and abbreviated as SPC. They are still so new that most people have never seen a company name followed by SPC rather than Inc. But at this point there are over 100 SPCs in Washington State.
Washington’s SPC statute is part of a national ‘social hybrid’ corporate structure movement. These laws allow a company to be formed for the purpose of pursuing profit along with a stated general and specific social or environmental purpose. One of the main aims of these laws is to protect directors from shareholder actions when the company does not attempt to maximize profit. In fact, under the Washington statute, SPCs must notify prospective investors that the company’s goals are not limited to earning a profit.
Several other states have similar laws; however, they follow the model of a ‘benefit corporation.’ The Washington statute is written with more flexibility than the model law and has been adapted for Washington State’s specifics. The Washington law also has fewer administrative requirements. As a result, Washington’s SPC has been adopted more frequently than other states have experienced.
The SPC statute allows an entrepreneur to pursue a ‘triple bottom line’: people, planet and profits. This might take the form of a new business whose goals are to make a profit, be environmentally sustainable and give a percentage of its profits back to the community. Shareholders are precluded from suing directors who fail to maximize shareholder wealth.
Formation of an SPC is simple and done through the Secretary of State, just as any other corporation. Special disclosures must be made to investors but it is hard to imagine anyone being confused if they choose to invest in an SPC. The law does impose a requirement that the company file an annual ‘social purpose report’ to shareholders and to make this report public. The report is simply a narrative of the company’s goals and their actions over the last year to achieve those goals and actions planned for the future.
An existing Washington corporation can convert to an SPC if the action is approved by the shareholders.
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