Hybrid Corporation: Everything You Need to Know
A hybrid corporation is a new type of corporate entity that blends the best features of nonprofit and for-profit corporations.3 min read
A hybrid corporation is a new type of corporate entity that blends the best features of nonprofit and for-profit corporations. Some of the states have passed the necessary statutes to allow the formation of hybrid corporations that can earn profits for their shareholders while fulfilling their corporate responsibility toward the public and society.
Hybrid corporations work on the concept of double bottom line, meaning that these corporations do not operate for the sole purpose of making profits, but they also work to improve the social conditions of their employees, customers, and the overall environment around them. Many hybrid corporations support nonprofit organizations through corporate giving programs and by encouraging their employees to volunteer for such organizations.
Hybrid organizations are growing in popularity because of their unique blend of for-profit and nonprofit objectives. Unlike nonprofit organizations, they do not solely rely on fundraising or completely devote themselves to charity. Instead, they develop a business model based on their social objectives. For example, a traditional corporation that sells a product in a normal way may choose to become a hybrid corporation by including in its business goals a commitment to donate to the charity a certain percentage of its revenue or a certain sum of money for each product sold.
However, since they are still in their nascent stage of evolution, you should approach them with caution. It's too early to predict the effectiveness of hybrid corporations.
Types of Hybrid Corporations
There are three types of hybrid corporations. All of them have one thing in common — the Internal Revenue Service (IRS) views them as for-profit entities, and their income is subject to income tax like any other for-profit organization. Hence, donations made to a hybrid corporation cannot be deducted as a charitable gift.
Low-Profit Limited Liability Company (L3C)
L3C companies get their investment from foundations and investors looking for a return on their money. Foundations make program-related investments or PRIs in these companies, which are in the nature of loans and not grants. PRIs count as charitable spending for the investing foundations provided the charitable purpose of the company's project is approved by the IRS. The L3C governing documents are designed keeping this approval in mind.
Benefit Corporation (B-Corp)
Benefit corporations must meet certain standards of accountability and transparency, and their operations must have a positive impact on the society or the environment. A third-party organization called B-Labs is engaged in advocating the accountability standards to benefit corporations and encouraging the state governments to pass the necessary statute for formation and operation of benefit corporations.
Often used interchangeably, there is a subtle difference between a B-Corp and a benefit corporation. A benefit corporation is one which is registered with the appropriate state agency responsible for governing benefit corporations. A B-Corp, on the other hand, refers to a corporation certified by B-Labs, a nongovernment, nonprofit organization.
Flexible Purpose Corporation (FPC)
- An FPC is a new form of hybrid corporation.
- It is similar to a benefit corporation, except for the fact that its charitable purpose must be more specific.
- FPCs develop their own standards for accountability and transparency instead of getting external certifications.
- As of now, very few states allow forming of one or more types of hybrid corporations.
What Are Benefit Corporations?
Benefit corporations are created with an objective to have a positive impact on the society and the environment while generating profits for their investors.
Structurally, they resemble traditional corporations; they have shareholders as their owners, and they appoint directors and officers just like a normal corporation. However, the officers in charge of operations in a benefit corporation have an additional duty to consider the social and environmental impacts while making business decisions. Similarly, shareholders of a benefit corporation must also consider the company's success in terms of positive impact it generates on the society and the environment rather than considering the company's growth alone.
Since benefit corporations are registered with the designated state agency, they must comply with certain regulatory requirements. In addition to financial reports, they must also publish benefit reports to discuss the impact of their social and environmental endeavors.
If the shareholders of a benefit corporation are of the opinion that their corporation could not keep up its commitment toward the society or the environment, or has failed to report the impact of its efforts, they have a private right of action, namely benefit enforcement, to make the corporation stick to its benefit purpose.
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