Creating a corporation can be a fun and exciting endeavor. However, when forming a corporation in Texas, knowing the objectives of the business can determine the formation and structure. From for-profits to nonprofits, social purpose to public benefit, there is seemingly a corporate structure for any objective or purpose. Yet, knowing the characteristics, benefits, and requirements associated with each will help ensure the business is best positioned to achieve its objectives.
Texas for-profit corporations, as the name suggests, are corporations formed in Texas, with the purpose to make a profit for the company’s shareholders. As governed by Chapter 21 of the Business Organizations Code (the “Code”), for-profit corporations are controlled by a board of directors. The boards of directors adopt bylaws, which determine the corporation’s management, and implement strategies to serve in the best interest of the shareholders. Members of the board of directors owe the corporation’s shareholders a fiduciary duty. Broadly, a fiduciary duty is an obligation to serve the best interest of another. Here, members of the board will act to the serve the best interest of the shareholders, even if those actions are at odds with the community, stakeholders, or world at large.
Unlike for-profit corporations, nonprofit corporations are not aptly named and are permitted to make a profit. There is a caveat for nonprofit corporations, which requires the profits generated by the corporation to be directed to a “good cause”, and the income of the corporation not be allocated to “a member, director, or officer of the corporation,” unless otherwise exempted by the Code. (see Tex. Bus. Org. Code 22.005(5)). Section 22.054 of Chapter 22 of the Business Organizations Code provides four exceptions to the general rule. Here, the Code explains a corporation may (1) pay reasonable compensation to the corporations members, directors, or officers for their services rendered to the corporation; (2) provide benefits to the members of the corporation consistent with the corporation’s purpose; (3) upon termination of the corporation, provide distributions to the members, consistent with the Code; and (4) make distributions, in limited circumstances, of income to entities otherwise exempted by the Internal Revenue Code 501(c)(3).
Social Purpose Corporations
Where for-profit corporations serve to the benefit of its shareholders and nonprofits serve to a “good cause”, social purpose corporations are designed to bridge the gap between the two and facilitate an entity that uses entrepreneurial principals to serve a particular social purpose or cause. Added with new Chapter 23 of the Code following the 2013 legislative session, social purpose corporations allow for-profit corporations to have a social purpose in addition to its for-profit purpose. At its core, the inclusion of the addition of social purpose corporations allows for-profit corporations the opportunity, but not obligation, to pursue a social cause concurrent with their for-profit objectives.
Public Benefit Corporations
Public benefit corporations are the new kids on the block, were added to the Code following the 2017 legislative session, and are included in Chapter 21 under the newly added Subchapter S. As provided by the Code, these corporations must (1) identify at least one public benefit to be promoted by the corporation; and (2) provide a statement explaining the for-profit corporation has elected to be a public benefit corporation. Further, the Code defines “public benefit” to illustrate the purpose of these corporations. In Section 21.952 of the Code public benefit is defined as “a positive effect, or a reduction of a negative effect, on one or more categories of persons, entities, communities, or interests, other than shareholders in their capacities as shareholders of the corporation, including effects of an artistic, charitable, cultural, economic, educational, environmental, literary, medical, religious, scientific, or technological nature[,]” which provides a tremendous amount of leeway for corporations. Still, these corporations must still operate to serve the benefit of the public. Section 21.956, which provides the duties of directors, requires the board of public benefit corporations to manage the affairs of the corporation in a manner that balances “(1) the pecuniary interest of the shareholders; (2) the best interests of those persons materially affected by the corporation’s conduct; and (3) the specific public benefit or benefits specified in the corporation’s certificate of formation.”
Knowing the purpose of the corporation, as well as the goals and objectives of the shareholders, will help determine which type will best serve the corporation’s needs. While a for-profit may be the simplest formation, as it does not impose additional obligations concerning the corporation’s allocation of income or management, this option may be deemed by the public as too self-serving, which may adversely affect the shareholders of the corporation. Conversely, the restrictions and regulations associated with public benefit corporations may be too burdensome and may serve to the corporation’s detriment.
The information contained in this post is for general information and educational purposes only. The application and impact of laws can vary widely based on the specific facts involved. Given the changing nature of laws, rules and regulations, and the inherent hazards of electronic communication, there may be delays, omissions or inaccuracies in information contained in this publication. Accordingly, the information on this post is provided with the understanding that the author and publishers are not herein engaged in rendering legal, accounting, tax, or other professional advice and services. As such, it should not be used as a substitute for consultation with professional accounting, tax, legal or other competent advisers. Before making any decision or taking any action, you should consult a professional.