For Profit, Nonprofit, Benefit and Flexible Purpose Corporations

Corporations generally are understood to be for-profit, and the board of directors and the officers of the corporation are required by law to manage the corporation in the financial interests of the shareholders. In a sense, the financial interests of the shareholders are supreme to any other consideration that the management of the corporation takes into account. For most enterprises this makes sense, but in certain cases corporations are organized to serve interests other than the financial interests of the shareholders. In these cases, an enterprise might consider forming a non-profit, benefit, or flexible purpose corporation.

Non-profit corporations

For organizations that want to run their business in the interest of something other than the profit of shareholders, most states offer non-profit corporations. There are a variety of types of non-profit corporations, such as mutual benefit corporations (that represent the interests of their members, though they do not engage in directly creating profits for them) and public benefit corporations (that aim to create benefits for the public).  In each non-profit corporation, the law usually requires the board of directors or the membership to include a “purpose” for the corporation in its articles of incorporation. The board of directors and officers must then act in accordance with furthering that purpose, and may not act on behalf of the corporation in their own financial self-interest. Due to the requirements to act within the non-profit purposes, the regulation of non-profits is somewhat complex and offers less flexibility than a regular corporation, and in many states they are overseen by the state attorney general or some charity-monitoring regulator.

Many non-profit corporations apply for 501(c) status under the tax code. This provides the non-profit corporation with certain tax benefits depending on the type of status that is obtained. It’s important to note that not all non-profit corporations receive 501(c) status, as that is a separate application and set of regulations managed through the Internal Revenue Service (rather than through the state attorney general’s office, which typically provides the regulatory regime for non-profit corporations).

Benefit and Flexible Purpose corporations

Recently a few states have been adopting new types of corporations that aim to bridge the gap between for-profit and non-profit corporations. The idea is provide for an entity that is profit-seeking but that also incorporates other purposes into its official purposes. As of 2012 California has adopted two new corporate forms that aim to address that point.

A Flexible Purpose Corporation (FPC) allows shareholders to include one or more “special purposes” in its charter (such as promoting environmental sustainability or providing for employee welfare). As a result, directors and officers may balance these special purposes in their decision-making and will have a “safe harbor” that protects them and the corporation from shareholder lawsuit liability for taking the special purpose into account. it is otherwise very similar to an ordinary corporation. A flexible purpose corporation is a vehicle for traditional for-profit enterprises to include consideration of certain social purposes in its business approach.

A Benefit Corporation is a new type of entity that requires boards to consider certain public benefits in its decision-making and to issue “benefit reports” on their impact on those public interests. The public interests are not selected by the board or shareholders, but rather are to a standard set by statute: the Benefit Corporation must make a “material positive impact on society and the environment, taken as a whole, as assessed against a third-party standard” or it can be set to address certain specific statutory purposes. It is designed mostly for private enterprises that wish to avail themselves of socially-responsible capital by managing their corporation to the social requirements of a third-party (usually either a socially-responsible investor or an organization certifying social responsibility).

Neither of these new types of entities are eligible for tax exemption. Rather, they are for for-profit enterprises that would like to include purposes other than profit in their corporate decision-making.