Effective, January 1, 2012, California law now has authorized the formation of two new types of corporate entities: Benefit Corporations and Flexible Purpose Corporations. Traditional corporations, which are owned by their shareholders, will generally operate for the maximum benefit of those shareholders. Officers and directors whose actions arguably vary from that goal may find themselves in hot water with the shareholders for whom they work. For those who wanted to create an entity that whose purpose was more to serve the public good, existing law generally required them to form a nonprofit corporation which carried with it many restrictions on its mode of operation and did not allow profits to be distributed to the persons forming the business.
However, not all corporate owners are that single minded. Some would also like to benefit society in general along with their own self interest. If you are in a business where demonstrating your social responsibility is important to you or may give you an advantate over your competitors, these two new types of corporations that California has authorized this year may be of interest.
The two new California entities allow you to have a for-profit business which is also designed to have a public purpose but operate in somewhat different ways.
Benefit Corporations are formed for the general public benefit such as 1) Providing low-income or underserved individuals or communities with beneficial products or services; 2) Promoting economic opportunity for individuals or communities beyond the creation of jobs in the ordinary course of business; 3) Preserving the environment; 4) Improving human health; 5) Promoting the arts, sciences, or advancement of knowledge; 6) Increasing the flow of capital to entities with a public benefit purpose; 7) The accomplishment of any other particular benefit for society or the environment.
The new law requires Benefit Corporations to annually report to their shareholders and to the public on their website how they measured up against that third-party standard.
Flexible Purpose Corporations.
Flexible Purpose Corporations must have one or more “special purposes” that include benefiting one or more of the following: 1) the corporation’s employees, suppliers, customers, and creditors; 2) the community and society; 3) the environment.
Under the new law, Flexible Purpose Corporation, too, must also provide annual reports to shareholders and on the company website where the management discusses details of what the company has done to achieve its special purposes, what it plans to do in the future, and how successful it has been. However, unlike a Benefit Corporation, these do not have to be measured against a specific third-party standard.
In recent years, we have all witnessed the disastrous results caused by imprudent decisions made by the leaders of our county’s largest companies in the name of short term corporate profits.j With the enactment of these new laws expanding the options for business owners to create entities that can carry out multiple purposes, California is one of several states leading the vanguard for more socially responsible businesses.
If you have an existing business or are contemplating starting a new one and these new entities have some appeal to you, consult with an experienced and qualified attorney to assist you with the conversion or formation.