The Next Big Thing: Flexible Purpose Corporations

By Reiser, Dana Brakman | American University Business Law Review, January 1, 2012 | Go to article overview

The Next Big Thing: Flexible Purpose Corporations


Reiser, Dana Brakman, American University Business Law Review


INTRODUCTION

Over the past few years, jurisdictions across the country have enacted specialized organizational forms to house social enterprises. Social enterprises are entities dedicated to a blended mission of earning profits for owners and promoting social good. They are neither typical businesses, concentrated on the bottom line of profit, nor traditional charities, geared toward achieving some mission of good for society. Their founders instead see value in blending both goals. They believe their social enterprises will be superior to traditional businesses by considering and internalizing the social costs they produce.1 They believe social enterprises more efficiently produce social goods than traditional charities by applying business methods to this important work.2 Yet, these social entrepreneurs worry traditional organizational forms designed for either businesses or charities will constrain their ability to achieve the gains they see in blended mission enterprises.3 Legislatures have obviously been convinced. Since 2008, lawmakers in nearly one-third of U.S. jurisdictions have enacted enabling legislation providing one or more specialized forms designed to house social enterprises.4 Thus far, these specialized forms have taken three distinct types, the latest of which is the subject of this Article: the flexible purpose corporation.

Part I places the flexible purpose corporation ("FPC") in the broader context of other specialized legal forms established to house social enterprise. Part II explores the FPC in greater depth. After explaining the genesis of its enabling legislation, this Part details and critiques its major provisions. These components segregate the FPC form from traditional for-profit and nonprofit corporations. The statutes structure FPCs' operations, guide their fiduciaries, and empower their shareholders with enforcement rights. Part III summarizes my evaluation of these attributes and compares them with relevant aspects of other specialized forms for social enterprise. Part IV briefly concludes.

I. THE FPC IN CONTEXT

The flexible purpose corporation became available under the California Corporate Flexibility Act of 2011 (the "FPC statute").5 It joined its (only slightly) older colleagues: the low-profit limited liability company ("L3C") inaugurated by Vermont in 20086 and the benefit corporation first adopted by Maryland in 2010.7 Since their initial adoption, these forms have each been adopted by several other jurisdictions and proposed in still others.8 These later adoptions are not identical to the originals, though sufficient overlap exists to examine the L3C and benefit corporation as archetypes. Shortly after California adopted its FPC statute, Washington approved legislation enabling a Social Purpose Corporation form, which shares some, though by no means all, of the elements of the FPC.9 Other state legislatures have considered new forms that share features with the FPC,10 and other countries have implemented yet further models.11 To situate the FPC form in context, without overwhelming the reader with details on too many jurisdiction-specific enactments, this Part will discuss the major features of the L3C and benefit corporation in brief.

The low-profit limited liability company operates like a standard limited liability company ("LLC") with only a handful of deviations. All of these changes address the specialized purposes adopting entities must pursue. Specifically, L3Cs must "significantly further[] the accomplishment of one or more charitable or educational purposes within the meaning of" the Internal Revenue Code sections defining charitable contributions,12 and "no significant purpose of the company is the production of income or property."13 That said, an L3C that actually produces significant income or capital appreciation will not be disqualified from this status by virtue of those facts alone.14

Other than these adaptations of the L3Cs' purposes, the statutes typically subject them to ordinary for-profit LLC law. …

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