The New California Hybrid Forms Hit the Street January 1, 2012: The Benefit and Flexible Purpose Corporations

As a result of California laws enacted on October 9, 2011, entrepreneurs and existing corporations have two additional “hybrid” corporate forms to choose from beginning January 1, 2012: “Benefit” and “Flexible Purpose” corporate entities. Prior to the enactment of

AB 361

 (Benefit Corporation, California Corporations Code sections 14600-14631) and

SB 201

(F

lexible Purpose Corporation, California Corporations Code sections 2500-3503), entrepreneurs were forced to choose between forming as for-profit or nonprofit corporations.

Previously, directors of for-profit corporations engaging in charitable acts or promoting socially responsible policies would do so at the risk of the perception that they were impermissibly putting social purposes ahead of shareholder returns. Similarly, nonprofit corporations might risk losing tax-exempt status if they were perceived to engage in profitable activities rather than serving the 

public interest. As a Benefit Corporation or Flexible Purpose Corporation, organizations can legally pursue both socially responsible and profit-producing purposes at the same time. Both entities will be subject to the same taxes as for-profit corporations.

AB 361: The Benefit Corporation

The idea behind Benefit Corporations has been around since the early days of the United States when states began chartering corporations to achieve a specific public purpose, such as building bridges, roads and other infrastructure. Many argue that social ills came about as corporations became bound to maximize profits and were no longer chartered with a public purpose. Benefit Corporation legislation allows corporations to legally return to pursuing a specific public purpose.

Maryland enacted the first Benefit Corporation law in April 2010. Subsequently, Hawaii, New Jersey and Vermont enacted similar laws. Benefit Corporation laws are pending in Colorado, New York, North Carolina, Pennsylvania and Michigan.

Under the new law, the articles of incorporation of a Benefit Corporation must state that the corporation is being “formed for the purpose of creating general public benefit,” defined as a “material positive impact on society and the environment . . . as assessed against a 3rd-party standard.”

Specific public benefits can include providing low-income or underserved individuals or communities with beneficial products or services; promoting economic opportunity for individuals or communities beyond the creation of jobs in the ordinary course of business; preserving the environment; improving human health; promoting the arts, sciences or advancement of knowledge; increasing the flow of capital to entities with a public benefit purpose; accomplishing any other benefit for society or the environment.

Benefit Corporations will likely be utilized in a variety of industries, including companies that provide food, clothing apparel, office supplies and legal services.

SB 201: The Flexible Purpose Corporation

California is the first state to enact a law authorizing Flexible Purpose Corporations, although Colorado tried and failed to pass similar legislation.

In California, existing corporations and other business entities may merge or convert into a flexible purpose corporation by satisfying certain requirements, including approval of the conversion by a 2/3 vote of shareholders (or a greater vote, if the articles require). The law will also allow flexible purpose corporations to convert into a nonprofit corporation, a corporation, or other domestic business entity upon satisfaction of certain requirements.

Flexible purpose corporations may pursue profit and a “special purpose” at the same time. “Special purposes” include “charitable or public purpose activities that a nonprofit public benefit corporation is authorized to carry out” and “promoting positive short-term or long-term effects of …the flexible purpose corporation’s activities upon” the corporation’s employees, suppliers, customers and creditors or the community and society, or the environment.

Conclusion

These corporate forms join the ever-expanding list of potential structures for pursuing social enterprise in a for-profit context (along with regular corporations, limited liability companies, joint ventures, private-public partnerships and L3C’s). By allowing greater latitude for the establishment of businesses that do not neatly fit into for-profit or nonprofit categories, one hopes these new laws encourage businesses to stay and expand in California.

Nonprofit Leaders Surveyed

A new report was just released by

McKim Nonprofit Consulting

based on a survey of 70 nonprofit leaders in the greater Los Angeles area. In light of recent economic reports, the survey reveals critical trends impacting all nonprofits locally and nationwide. Some interesting data stands out. For example, the survey shows that while nonprofits have to increasingly rely on volunteers to deliver services, few know how to effectively manage the cadre of people who donate their time. That could jeopardize volunteer relationships, services and long-term donations. The survey also reveals that most boards lack education about their roles and responsibilities, which means that the boards are operating at a less than effective level and that they are not fully supporting the agencies that they purport to represent.

Read the

full report

.

Changes For DC Nonprofits Effective New Year's Day

via WorldAtlas.com

As the New Year rolls in, so do the extensive provisions of the new District of Columbia Nonprofit Corporation Act 2010 (the “Act”, D.C. Code

§29-401.01

), effective January 1, 2012. The law in this area has been rarely touched since 1962 and January 1, 2012 represents a significant turning point for nonprofit corporations in the District of Columbia with regards to how they will organize themselves in the future. Below, some of the most interesting elements of the Act are discussed. It can be argued that many of these provisions strengthen the transparency of DC nonprofit organizations and increase accountability and public confidence.

Directors and officers

A number of the provisions in the Act apply to directors and the standards and expectations of their personal duties. The duty of good faith, care and loyalty has been codified for all directors and officers and provides useful detail of fiduciary duties (

§29-406.30

). In a similar vein, the Act also lays out clear guidance on indemnification from personal liability to protect directors and contains provisions on insurance to directors and officers and advancement of expenses, amongst other points (

§26-406.11

). This new guidance will be a useful mechanism with which to review and update current organizational documents and policies to reflect the new legal requirements. The Act provides for a maximum board term of 5 years, although reelection is permitted for additional terms (

§29-406.05

). Considered together, these provisions provide clearer guidance relating to the boundaries of nonprofit directors and officers of DC nonprofit corporations.

Recordkeeping

The new Act details a number of required procedures regarding records and housekeeping issues including lists of key documents to be stored at the organization’s principal office (

§29-413.01

) and inspection rights of these documents for

directors and members (

§29-413.02

), emphasizing a theme of transparency and accountability. Similarly, financial statements must be made available to its members if requested, unless otherwise stated in an organization’s articles or bylaws (

§29-413.20

).

Amendments to Articles and Bylaws

If the nonprofit has members they can approve substantive changes to articles and bylaws (if not restricted in bylaws), encouraging directors and officers to be more interactive with the organization, again moving away from boardroom politics (

§29-408.20

). This will arguably help member organizations to be more front-facing and transparent with their members.

Members

Conversely, however, the definition of a ‘member’ has been defined under the new Act to include only those with voting  rights with respect to director elections and specific major transactions (

§29-410.02

). Membership nonprofits can avoid the potential pitfalls of this provision by expressly referring to the right nonvoting members can have. It could be stated that this provision forces organizations to reflect and review the structure of voting rights within their organization, and clarify this transparently through express provision contained in their Bylaws and Articles.

Above covers only a handful of the new provisions coming into effect in the District of Columbia for nonprofit corporations on January 1. Reviewing key organizational documents and policies is strongly recommended to ensure there are no nasty surprises in the form of noncompliance in the face of this new far-reaching legislation.

Community Development Finance

For this month’s Nonprofit Spotlight we interviewed Dan Leibsohn, President, Executive Director and Founder of Community Development Finance (CDF).  Dan is also Founder of Capital Flows, a community development consulting company, and founder of the Low Income Investment Fund (formerly Low Income Housing Fund).

Mr. Leibsohn graduated from the University of Michigan in Economics and received a Masters in Public Administration from Harvard University where he also studied city planning.

Dan Leibsohn

In May 2009, CDF opened the first nonprofit, full-service check cashing store in the country in the Fruitvale neighborhood of Oakland, California.  It was designed to help low-income families lower their costs, save money and move out of poverty.  The check cashing component of the institution is designed to be financially sustainable through earned revenue.  We recently traveled to Dan’s store to learn more about the check cashing project.

Q: What is a “check cashing” store and how was yours created?

A: Our check cashing store is a nonprofit corporation that provides check cashing services at much lower prices than the market rate stores.  For example, we charge customers a below-market rate fee of 1% for a check under $1,000 compared to 3% at the store a couple of blocks away.  Our customers are low-income community members who may become subject to burdensome overdraft and “non-sufficient funds” fees at traditional financial institutions.  By using our services, they can avoid such unnecessary fees while developing the capacity to enter the financial mainstream again at a later date.  We have a lending program and all the other traditional check cashing services and we also offer financial coaching services and small business assistance.

Today’s economy has severely impacted our customers who now earn less money and bring in smaller checks.  Also, some of our customers who are immigrants used to earn enough money in America to be able to send some home to their families.  Now some immigrants in America are receiving money from relatives abroad because they cannot earn enough here.  The effects of the poor economy inspired us to provide a bridge to traditional banking for low-income community members. 

Q: What are the ideal circumstances for operating a check cashing store?

A:  The needs for any location are different based on the population living and working nearby and on the competition in the area.  In order for our check cashing store to provide its services at below market prices, the store must rely on high volume.  In other words, the store is self-sustaining as long as we have a lot of customers paying a small fee.  Additionally, for our store to be sustainable, it is crucial to have a location that is convenient for our customers.  Finally, we rely on grants to cover the rest of our costs.

Q: Tell us about your goals for the check cashing store project.

A: The ultimate goal of the check cashing store project is to get our customers to enter the financial mainstream if they want to and are able to.  Our check cashing store can provide a bridge to traditional banking.  Once our customers learn how to manage an account correctly, traditional banking will be less expensive for them.  We also hope to be able to serve those who cannot enter the financial mainstream with lower prices and financial coaching.  We estimate that we save our customers about $150,000 annually through our lower costs and other services.

Q: What is the biggest challenge the check cashing store has recently encountered?

A: We had experienced a lack of interest in the financial coaching services that we offer.  Our customers might have been embarrassed about the fact that they had financial issues, or perhaps they didn’t have time to use our services. 

To overcome this apparent lack of interest, we made the process less formal.  By engaging our customers in casual conversations at the beginning of the process, we have successfully increased the number of participants in our program and the depth in which we are able to assist them.

The other major challenge is building up our volume and obtaining grants and donations to support the full effort.

Q: Can you tell me about a success story that holds particular significance with you?

A: We have recently had a breakthrough in our lending program.  We have provided 1,177 loans at one third to half the market fees and at a loss rate of less than 2% where the average loss rate for many pay-day loan alternatives is 8-12%.

Another is the one I mentioned before: our being able to save customers about $150,000 per year.

Q: How do you see the Community Development Fund going forward and what are your personal future goals for the organization?

A: There are many possibilities.  For example, with the right support, we believe that we can help to capture 5-10% of the pay-day loan market by creating a network of nonprofit lenders throughout the state.  We see ourselves creating this network by partnering with nonprofits, credit unions, CDFIs, church groups and public agencies.

In general, we’d like to pass along what we’ve learned about the lending market, financial coaching and the needs of check cashing customers by helping to expand these approaches to as many other locations and organizations as possible.   

Q: How does this tie to the field of microfinance?

A: Appropriately structured micro-finance lending is a large key to assisting low-income households and small business in escaping poverty. Everyone focuses on pay-day lenders and check cashing stores, however, there is an entire set of financial institutions and practices in low-income neighborhoods that replaces the institutions that the rest of the society uses. Low-income households tend to use the entire range of services, not just an occasional or isolated service; they are more expensive and make it more difficult for people to move out of poverty. They include car title loans, rent-to-own stores, pawn brokers and others. This entire range of institutions constitutes a dual financial economy and it is this entire range that must be addressed.  We believe that micro-finance plays a major role in this effort.

In brief, micro-finance lending and financial counseling are key to assisting low-income households and small businesses escape poverty.  An entire dual economy exists in these low-income communities that bypasses more traditional financial institutions.  Pay-day lenders and check cashing stores are only a small piece of this puzzle.  Car title loans, rent-to-own stores, pawn brokers and other businesses often charge astronomical interest rates for their services and fuel the cycle of poverty.  These institutions and their effect on low-income communities must be addressed, and  micro-finance and financial counseling can play a major role in helping these communities transition into a higher socioeconomic level.

California Supreme Court Abolishes Redevelopment Agencies

.

On December 29, 2011, the California Supreme Court held that ABX 126

, a law that abolished redevelopment agencies

in September 2011, is constitutional, and held ABX 127, a law authorizing the existence of redevelopment agencies as long as they make a large annual payment to the state, unconstitutional. The court’s decision, therefore, upholds the abolition of redevelopment agencies and renders invalid the only law permitting the resurrection of these much-needed agencies.

Funding for affordable housing is desperately needed in California and prior to today’s holding, redevelopment agencies were a major source of that funding. Because there is evidence that suggests the California legislature did not intend this outcome, one can only hope that the legislature will take immediate action to prevent the loss of over $1 billion annually in affordable housing revenues in California in the new year.

Treasury Department Publishes Study on Supporting Organizations and Donor-Advised Funds

via Groco.com

President Bush signs the

Pension Protection Act.

 On December 6, 2011, the Treasury Department reported to Congress on the results of the

Pension Protection Act of 2006

. The report specifically addressed whether the tax deduction for contributions to supporting organizations and donor-advised funds is appropriate, given issues around the use of charitable contributions for the benefit of the donor.

The report describes how federal tax law treats supporting organizations and donor-advised funds, providing a statistical analysis of such organizations based on IRS income data from 1985-2006 and individual income-tax returns. The report also covers public comments in response to IRS Notice 2007-21. Respondents felt donor advised funds assisted donors, but did not agree that consolidated reporting of funds was appropriate.

The Treasury ultimately concludes that the contribution deduction rules for donor-advised funds and supporting organizations are appropriate because donors relinquish control of assets and because the time lapse between the receipt and use of assets is the same as the time lapse that applies to the use of assets by any other public charities. Furthermore, sponsoring organizations have no legal duty to use the funds in the way preferred by the donor. As a result, the Treasury does not recommend new legislation at this time.

Deep Green Housing and Community Development

For our first Tax Exempt Talk blog post, we interviewed Zoe Ellas, Executive Director at Deep Green Housing and Community Development. Zoe has more than fifteen years of experience in nonprofit development finance and nine years of experience in affordable housing and community development work. She is an expert in financial management and communication. Early in her career, she worked as a consultant for the Financial Sector Vice Presidency of the World Bank Group. Zoe earned her B.A. in Economics and French at Drew University and then went on to earn her M.B.A. in Finance at American University’s Kogod School of Business.

Zoe Ellas, Executive Director,

Deep Green Housing and

Community Development

Deep Green Housing and Community Development, formerly known as Beyond Shelter Housing Development Corp.

, is a 501(c)(3) organization that focuses on sustainable development to provide safe, decent and affordable housing for families, to improve neighborhoods and build community.

Q: Many nonprofits have recently faced funding challenges. How has Deep Green Housing tackled this issue?

A: We have downsized, decreased our overhead and have slowed down the acquisition of new projects. We have also expanded our regular sources of financing to include property management revenue rather than development fees. Deep Green Property Management Services, LLC, the property management affiliate, was created in 2006 to provide cost-conscious, responsive and “green” property management services to Deep Green Housing’s projects, in addition to providing a new revenue stream. This strategy has successfully increased the certainty of funding that can be used for certain recurring operating expenses, such as staffing costs.

Q: In addition to cutting costs, what other changes have you made to survive?

A: All our new developments will be LEED-certified and will include more efficient heating, lighting and ventilation, drought-resistant landscaping, recycled materials, and less construction waste. Even though this will slightly increase our up-front development costs, the organization’s buildings will be cheaper to maintain in the long run, especially where the cost of utilities is the hardest to control. We’ll begin constructing our first LEED-certified building in January 2012.

Q: Has the organization forged any productive new partnerships?

A: Yes, we’ve successfully partnered with for-profit developers to resist the tendency toward developing low-income community housing in cheaper, less urban areas. The organization believes it can best meet the needs of the South Los Angeles community members it serves by improving their existing communities instead of creating new ones. The Central Village Apartments is our first mixed-use project and was created in partnership with an experienced retail developer. Central Village features 85 affordable one-, two- and three-bedroom units above a 45,000 square foot commercial retail center that includes a full-service grocery store, doctor’s offices, subterranean parking, and restaurants.

Despite decreasing government financing for nonprofits, and as a result of Deep Green’s creative building, funding and partnership strategies, we are happy to report that the organization has successfully continued to provide safe, decent and affordable housing for families in the greater Los Angeles area.

BERGMAN and ALLDERDICE TEAM MEMBER

David Rosman

David Rosman is of counsel to the firm, and is a transactional real estate attorney, including commercial acquisitions, sales, leases and syndications; Mr. Rosman also has over 30 years experience as a trial and appellate litigator, primarily in contract, commercial and real estate matters, including unlawful detainers, and has extensive experience with alternative dispute resolution. Mr. Rosman has handled judicial foreclosures, as well as non-judicial foreclosures (with experienced trustee/foreclosure services), and has also worked with receivers.

Mr. Rosman taught general business law at the UCLA Extension program and Insurance Law at West Los Angeles School of Law, and serves as judge pro tempore on small claims appeals.

Mr. Rosman received his B.A. from Yale University, cum laude in 1975, and J.D. from UCLA School of Law in 1978. He is a member of the California and Los Angeles County Bar Associations. Published opinions include Abdul-Jabbar v. General Motors (Ninth Cir. 1996) 75 F.3d 1391. Mr. Rosman is the author of Without the Possibility of Parol, LOS ANGELES LAWYER, March 1998.

Mr. Rosman is admitted to the bar in California.

BERGMAN and ALLDERDICE TEAM MEMBER

Jennifer Post

Jennifer Post is of counsel to the firm. Jennifer has extensive experience in secured lending, private and public securities offerings, capital markets transactions and venture capital financings. Jennifer assists companies, investors, lenders and strategic parties in a variety of corporate transactions including entity formation, capital raising, lending and credit documentation, public offerings, mergers and acquisitions and general commercial and intellectual property agreements. Jennifer's practice includes compliance activities under federal and state securities laws including SEC and blue sky registrations, reporting and compliance, as well as stock listings and quotations. She has been practicing exclusively in the areas of corporate, finance and securities law for over twenty years and has lead transactions of all sizes and involving a variety of foreign jurisdictions.

Ms. Post was a partner with the major Boston law firm Edwards & Angell (now Edwards Angell Palmer & Dodge) before moving to California. Since relocating to California, she has served as counsel to a boutique venture capital firm in the San Francisco Bay area and with Richardson & Patel in Los Angeles.

Ms. Post holds a B.A. from Brandeis University, and a J.D. from Suffolk University Law School. She has been a panelist, speaker and facilitator at numerous educational and industry events and has authored articles in the areas of securities, venture capital, insolvency and fiduciary duties.

Ms. Post is admitted in the State of California and the Commonwealth of Massachusetts.