Benefit Corporations allow businesses, like Maine's Moo Milk Company, to align goals of social betterment with profiteering. Photo: David Hiser, (Flickr)

In California, profitable charity is no longer taboo.

California’s Corporate Flexibility Act, which will go into effect in January 2012, is the latest of several recent bills that establishes a new legal structure allowing profitable corporations to operate with with a stated social purpose without fear of being litigated. Most states require corporate profits to be used to the direct benefit of shareholders. Failure to maximize shareholder value, even in pursuit of environmental, social, or community betterment, can leave the organization vulnerable to lawsuits. Program-related investments are not widely used due to their legal complexities, planning and due diligence costs, and the steep penalties for any missteps in handling the investments. However, business owners and consumers alike are realizing that this old structure of categorization needs updating.

“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,” R. Todd Johnson, a lawyer and leading advocate for changing state legal structures, told the New York Times.

New breeds of organizations that marry profit with humanitarianism are slowly emerging across the country. "Benefit Corporations are 'a new class of corporation that allows companies to pursue profit as well as a strong social and environmental mission,'" as Venturebeat puts it. Currently six states have approved the concept: California, Virginia, Maryland, New Jersey, and Vermont. While benefit corporations also place greater emphasis on stakeholders than shareholders, this class title is more restrictive than its California's new "flexible purpose corporations." Unlike FPCs, BCs must set social and environmental goals that comply with legal definitions and directors must acknowledge the impact of corporate decisions on the community and the environment as well as their shareholders.

The third class of corporate-charitable hybrids, low profit limited liability company (L3C), have taken root in nine states. While not-for-profits are exempt from taxes, L3Cs are taxed but legally protected to accept program-related investments from private foundations and net profit. Moo Milk Company in Maine has been a notably successful L3C. In an effort to preserve local, organic milk production, Moo Milk can focus on educating their customers on local community and environmental issues without having to sacrifice financial gains.

While many support this new corporate class, others argue that the spread of these businesses will compromise the financial integrity of organizations that might otherwise register as traditional nonprofits. Hybrid corporations are not required to have a board of directors or transparent financial dealings. The New York Nonprofit Press argues that “without these and other requirements, there is a high risk that L3Cs will be fertile ground for excessive executive compensation and conflicts of interest, something prohibited by the Internal Revenue Code and regulated in charities by the IRS."

In the wake of broadening the definition of corporation, undoubtedly many kinks will need to be untangled. However, if corporations can indeed exercise both social and financial responsibility, good may take a stronger stand against greed in the marketplace.