California’s New Corporate Entities: Benefit Corporations and Flexible Purpose Corporations

Benefit Corporations and Flexible Purpose Corporations: A little over a year ago on January 1, 2012, California’s new corporate laws went into effect broadening the choices for corporations to include the following two new corporate entities:  benefit corporations and flexible purpose corporations. The effect of the new legislation was to allow companies that wish to pursue, both, social and economic objectives the ability to formally include those missions into their articles of incorporation. Previously, a corporation only had the option of forming as a traditional for-profit corporation or a non-profit corporation. However, that left companies having to pick between philanthropic activities and profit-motivated activities. The new entities create a hybrid category for a corporation seeking to do both.

The practical effects is that the board of directors would, now, be able to consider the public good, when making decisions without running the risk of being sued by shareholders for failing to maximize their profits. Basically, the directors will be shielded from liability for pursuing social goals even if it means a decrease in profit if they are registered as a benefit corporation or flexible purpose corporation.

California is the seventh state to allow these hybrid forms for companies. Looking at legal current events, Vermont, Maryland, New York, New Jersey, Virginia and Hawaii have previously passed similar legislation.

What’s the difference?:
Benefit Corporation v. Flexible Purpose Corporation

There are three big differences between the two new categories.

First, benefit corporations must have a positive impact on society and the environment as a whole. While, a flexible purpose corporation must have a positive impact on one of the following: its employees, suppliers, creditors, the community and society; or the environment.

Second, the success of a benefit corporation is determined by an independent third party auditor which certifies their benefit corporation status. There are no such requirements for a flexible purpose corporation.

Third, benefit corporations have to report, yearly, a comprehensive list of their activities illustrating how the company actually pursued their stated purpose. On the other hand, a flexible purpose corporation isn’t required to make such a comprehensive report.

Generally speaking, flexible purpose corporations, as the name suggests are more flexible and have fewer requirements. So why would anyone choose to incorporate as a benefit corporation? While legislation governing benefit corporations are a lot stricter, this will be the very thing which investors who are truly committed to the environment will find appealing. As the “green” trend has been on the rise, so have the number of investors seeking a company serious about the public good rather than just the greedy profit driven ways of most traditional corporations.

Who is making use of this?

By mid October 2012, about 75 corporations had registered as a benefit or flexible purpose corporation. The list includes both, large pre-existing corporations as well as start-up companies. Patagonia, the outdoor apparel company was the first to change its corporate status to a benefit corporation just one day after the legislation went into effect.

Pros and Cons

Companies such as Patagonia, which has a long standing history of supporting environmental causes, are in favor of the new corporation entities because it enables socially and environmentally driven companies to remain committed to those missions and raise capital even despite changes in ownership. On the other hand, there is some criticism, particularly, surrounding flexible purpose corporations, which unlike benefit corporations, are not required to undergo yearly audit. This leaves room for companies to apply for the designation in order to gain good press and then continue to focus simply on profit maximization rather than social or environmental welfare.

Benefit Corporations and Flexible Purpose Corporations

The Ortega Business Law Firm
San Diego Business Law