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.”
But proponents, like Jed Emerson, a pioneer in developing what he calls “blended value investing,” contend that many of the new organizations do not fit neatly into what have been the accepted models. “Over the last 10 to 20 years, there’s been a host of organization managers and financial investors saying the traditional approach to investing in this bifurcated framework of for-profit and nonprofit doesn’t capture what they’re really trying to achieve,” Mr. Emerson said. “Alternative structures like this allow investors and entrepreneurs to pursue social and environmental impact together with various levels of financial performance.”
One such company, ardentCause, was about to become a traditional limited liability company, or L.L.C., when Michigan began allowing businesses to incorporate as low-profit, limited liability companies, or L3C’s.
The company, founded by three veterans of the automotive industry, develops database software to help nonprofits manage and share information. “It was perfect for us because we believe businesses and nonprofits alike should run sustainably and profitably, but the main motive for us was the mission,” Rosemary Bayer, ardentCause’s chief executive, said of the L3C structure.
Its first product was introduced last fall with support from the First Step Fund, a pool of venture capital drawn from Detroit foundations as part of a broader effort to reinvigorate the city’s economy. Ms. Baer said ardentCause was currently negotiating with another foundation for investment.
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