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Various states, whose laws regulate corporate governance, have begun to catch up with the reality that not every investor or shareholder subscribes to the view that “greed is good.” Far from being a nation of Gordon Gekkos, many Americans, and millions of business owners, want to do more than simply turn a profit — although they certainly have nothing against making money. Their goals also include improving the environment and developing communities. In the classic model, these social purposes had to be pursued in a non-profit corporation. But some regulations on tax-exempt non-profits such as limitations on political and lobbying activities, attracting and raising investment capital in addition to taxes on unrelated business income have made it a less desirable business entity for some.

In recent years, two new types of corporations have been created to address the goals of making money, attracting private investors and addressing societal concerns: the benefit corporation and L3C. A study shows more than $120 billion in potential investments for these socially -minded companies. The emergence of these corporations serve as alternatives to the traditional C or S Corporation structures.

Under the traditional corporate structure, corporate directors had a fiduciary duty to exercise business judgment with the goal of maximizing profits so long as it was lawful. In fact, corporate officers and directors could be held legally liable to shareholders of the corporation if they did not maximize profits to the exclusion of other goals. In the eighties and nineties, at the height of leveraged buyouts, many directors were reluctant to sell the corporation because doing so would destroy communities. However, they felt that they had no choice but to vote for the buyouts in order to avoid incurring personal liability. These “bust ups” put a lot of debt on corporations and forced them to reduce employment and close plants and offices in order to pay off all the debt loaded into the corporation.

The benefit corporation is recognized in Maryland, California (which also has the flexible purpose corporation), Hawaii, Vermont, Virginia, New Jersey and (as of February 14, 2012) New York. In order to incorporate as a benefit corporation, the corporation must have the dual purpose to create general public benefit by creating value for its’ stakeholders – such as the community, local and global environment, employees, suppliers and customers- and create a profit for shareholders. For example, if the charter of a benefit corporation makes clear that it is organized to build affordable housing, officers and directors are therefore held accountable to achieve both this objective and a profit. Legally this means, the benefit corporations can be shielded from lawsuits by shareholders who argue the corporation has diluted their stock by putting general social value over profit .

This general public benefit is considered to be in the best interest of the corporation and must be measured by an independent third party. The weight to be given to the stakeholders is for the corporate board of directors to decide. The benefit corporation also carries a public accountability component where within 120 days, from the end of each fiscal year, it is required to publish a “Benefit Report” stating how it achieved its beneficial purpose along with annual financial reports .

B Corps are certified by the B Lab as having met a high standard of overall social and environmental performance. While benefit corporations do not enjoy any federal or state tax benefits that are equivalent to charities, B-Corps were granted tax breaks by the City of Philadelphia .

The L3C (low-profit limited liability company), a hybrid between a non-profit and for-profit corporation, possesses the same liability protection and pass- through tax treatment as an LLC. The L3C must have a primarily charitable purpose with profit making as a secondary purpose. Vermont, Rhode Island, Maine, Michigan, Illinois, North Carolina, Utah, Louisiana, and Wyoming recognize the L3C. The L3C structure, through its flexible membership rules, attempts to attract Program Related Investments (PRI) – equity or debt from a foundation parallel with the charitable purpose of the foundation- from private foundations. L3Cs, in contrast to tax-exempt charities, can distribute post-tax profits to its owners.

From the point of view of IRS, the benefit corporation and L3C are no different from traditional for-profit entities. The income they generate is fully taxable, and contributions or investments directed at these entities are not deductible as a charitable contribution to donors. Whether the benefit corporation or L3C will be able to qualify for local, state or federal tax breaks or exemptions seems unlikely.

Still questions remain on these new corporate entities. For instance, how are directors supposed to balance the goal of making a profit with that of achieving a social objective? Do they first ensure that capital gets some minimal return before pursuing expensive social investments? Or is it ok for directors to leave investors with little or even negative return on investment so long as the social purpose is achieved? Given these possibly conflicting goals, will members of the business community and public be willing to serve on the boards of these new entities? Or will they be worried about the specter of shareholder derivative suits in the event they make a decision causing profits to plunge?

Surely as these new forms become established the financial community will promote funds to invest in socially responsible businesses and the available capital will increase. It will be up to the courts, owners and managers of these businesses to sort out the right formula to balance social progress with the bottom line. In the meantime, whether the tax-exempt non-profit will be jettisoned for the benefit corporation or LC3 remains to be seen. If you are interested in creating or changing your current corporate structure to a benefit corporation or L3C, contact an attorney.