Oct 132011
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New companies that are part social benefit and part low-profit entities

A new type of company intended to put social goals ahead of making profits is taking root around the country, as more states adopt laws to bridge the divide between nonprofits and businesses.

California is the latest state to adopt a statute permitting what is called flexible-purpose corporations, new companies that are part social benefit and part low-profit entities. The companies are now allowed under laws in more than a dozen states and two Indian tribes.

States like New York and Massachusetts are weighing comparable legislation — sometimes also known as low-profit limited liability or benefit corporations — and efforts are afoot to get federal legislation passed that would lower hurdles to the creation of such companies, including a quiet push to get preferential tax treatment for them.

Many of the companies adopting the new structures provide services to nonprofits or are food purveyors that, for example, might employ the disabled. Perhaps the best known is MOO Milk of Vermont, a group of small dairy farmers.

Unlike a straight nonprofit group, these businesses can tap into conventional capital markets as well as philanthropy.

And unlike a for-profit corporation, the structure allows investors to emphasize the social mission over making money, and to be supported by money from foundations.

“Directors of many companies want to do the right thing, but they’re so busy looking at how not to get sued for failing to maximize profits that they don’t think more aspirationally about creating a great company that helps the planet and people and also makes money,” said R. Todd Johnson, a lawyer who is among the leaders of the movement to get states to create new legal structures.

Not surprisingly, the trend concerns some executives in charge of charities, who fear increased competition for philanthropic dollars fueled by the enthusiasm for the new formats among foundations, many of which have been lobbying hard for new laws to foster this type of business.

Many corporate lawyers and regulators also are wary. The California Department of Corporation and the business law section of the corporations committee of the state bar association opposed the law, as have similar organizations in other states. They argue that the new structure holds an inherent conflict of interest and that it will lower standards of fiduciary duty.

“There’s a marketing job that’s being done that somehow these are special,” said William Callison, a lawyer in Colorado whose opposition helped defeat efforts to pass the hybrid incorporation law in his state. “I think they’re anything but special.”

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