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New Corporate Forms to Emerge in Rhode Island

January 10, 2012

Low-profit limited liability organizations allowed in RI starting July 1, 2012.

Once upon a time there were nonprofit corporations and for-profit corporations. The for-profit corporations were organized with the goal of making a profit, building a healthy business that contributes to the community by providing goods and services, employing people and delivering a return on the investment of the stockholder-owners. The nonprofit corporation was organized for a reason that is not-for-profit – to address a societal need and provide a social good to the community that was otherwise not being attended to.

In the last couple of years, new forms of corporate existence have emerged. Eight states and one Native American Tribe have authorized something called an L3C corporate form. This form of organization will be allowed in Rhode Island starting July 1, 2012.

The L3C or low-profit, limited liability company is a legal form of business entity that was created to bridge the gap between non-profit and for-profit investing by providing a structure that facilitates investments in socially beneficial, for-profit ventures while allowing not-for-profits to pursue additional resources via for-profit ventures. Some credit Bill Gates and his 2007 Harvard commencement address with planting the seed that has resulted in the L3C Corporation. Gates urged the graduates to invent “a more creative capitalism” where “we can stretch the reach of market forces so that more people can make a profit, or at least make a living, serving people who are suffering from the worst inequalities.”

In California as of January 1, 2012, two new corporate forms have been created – a “flexible purpose corporation” and a “benefit corporation”. On December 12, 2011 New York Governor Andrew Cuomo signed a law creating a New York Benefit Corporation form of entity. The bill becomes effective in mid February 2012. There is even a generic web site for these new corporations which refers to the need for various B Corp Legislation as “a new kind of corporation for a new economy”.

Why do some believe this new kind of corporation is necessary? The proponents indicate that for-profit corporations operate within a construct that places interests of shareholders (specifically the return to shareholders) as the primary, if not sole, objective of the corporation. So, if a corporation engages in philanthropy, acts in an environmentally conscious manner or promotes employee or community-friendly policies, the directors could face exposure if they are proven to favor social objectives at the expense of shareholder returns. These same proponents also argue that not-for-profit organizations risk the loss of their tax-exempt status if they stray too far toward profit-producing activities.

In many respects I think this structure could lead to weakening our existing free-market system of entrepreneurial capitalism and crack the door open to tax our financially strong not-for-profit organizations. I know there are many examples of the evils of capitalism and the super wealthy not-for-profit, but there are far more examples of the benefits society has realized from these two corporate forms of activity and this blog does not have the space to put forth a comparative list. But it is an undisputed truth that this country has become the greatest nation in the history of the world because of capitalism and a strong commitment to philanthropy by its citizens.

Here are a couple of examples of how the B Corp will hurt us. I am concerned that the B Corp will be constrained from taking aggressive action when dealing with the normal business cycles of growth and loss. For example, will B Corps be able to trim the workforce or lower compensation during downturns? Or will their social benefit format preclude those actions? The economies of Europe today are facing complete collapse due to these very policies constraining business and governments from acting in concert with the ebb and flow reality of every economy. Is this where we want to take the USA?

The not-for-profit corporation is not immune from assault either. For example, the academic not-for-profit corporations have attracted the interest of mayors, governors and the U.S. Congress as they have accumulated vast amounts of wealth. Moving these corporations out of the tax-exempt arena with the enticement that they are free to pursue profitable activities is a rouse I expect none of these institutions to fall for.

Why do I think this movement will eventually take over the majority of corporate formation? I see how easily the existing laws creating the B Corp format have sailed through state legislatures and been signed into law. No one is willing to fight something that calls for the creation of businesses with corporate social responsibility or that encourages not-for-profits to seek profitable activities so they have more resources to address the social issues they are in business to address. This makes such a good read, who will fight it (besides me)?

I fear that within a short period of time one will face criticism if you create a business that is other than one of these socially responsible corporations. And once this language is in your articles of incorporation and by-laws – woven into the very fabric of your organization - and you are not a tax-exempt entity or an entity free to manage for the bottom line, then life as we know it will have ended.

Food for thought as we as a society migrate through what will soon be history. Weigh in on the topic; let me know what you think.

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