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An Introduction to California Benefit and Flexible Purpose Corporations

teamwork.jpgAs of January 2013, eleven states, including California, and the District of Columbia, had all passed legislation allowing benefit corporations. Notably, the State of California instituted two new types of stock corporations effective January 1, 2012–a “flexible purpose corporation” and a “benefit corporation” (also referred to as a “B corporation”). These two new types of corporations serve as alternatives to the traditional “C,” “S” or 501(c)(3) corporations.

With the exception of 501(c)(3) non-profit corporations, prior to the additions of the B Corporation and flexible purpose corporation, the primary purpose of corporations had to be to maximize profit for its shareholders. In fact, prior to the advent of these two new types of corporations, a corporation’s shareholders could sue the corporation if the corporation took the environment, community employees, vendors–essentially anything other than maximizing profits–into account when making business decisions.

B Corporations

A benefit corporation is a form of for-profit charity. To qualify as a benefit corporation, a corporation must have a specific purpose: to create a “general public benefit,” which is defined as a “material positive impact on society and the environment.” In addition, B corporations are held to a different standard of accountability. Whereas traditional “C” and “S” corporations must make business decisions based on maximizing profits, directors and officers of B corporations must consider the effect of decisions on shareholders, employees, suppliers, customers, the community, and the environment when making decisions.

Finally, these corporations must maintain certain levels of transparency and public accountability above and beyond the transparency required of traditional corporations. All B corporations must publicly report on their social and environmental performances using established third-party standards. Specifically, a B corporation must publish for public review and inspection a “Benefit Report.” The report must detail its performance over the past year in reaching its mission on both environmental and social dimensions. Existing companies can elect to change into a B corporation with a two-thirds majority vote of its shareholders.

According to the non-profit corporation B Lab, there are currently over 500 B corporations across the United States and Canada, a number that has grown exponentially since 2008. Some current examples of these companies include Bay Area companies Method Products, Inc., Moving Forward Education, Change.org, Core Foods, and Bison Brewing Company, and companies with national reach, including Etsy, Ben & Jerry’s, and Patagonia.

Flexible Purpose Corporations

Similarly, a flexible purpose corporation also allows a corporation to identify a legitimate corporate purpose beyond maximizing shareholder value. A flexible purpose corporation can choose a purpose that generally benefits society (e.g., a public or charitable purpose) to identify in its corporate documents, thus allowing it to have its own special purpose. Like a B corporation, a flexible purpose corporation must also publish an annual report disclosing how it is achieving its own special purpose.

The key difference between a flexible purpose corporation and a B corporation is that a B corporation must consider the environment, community, employees and suppliers when making decisions, whereas a flexible purpose corporation can identify one legitimate corporate purpose beyond just maximizing shareholder value.

B corporation and flexible purpose corporations have their advantages–namely, providing companies with the ability to make decisions that take into account the interests of the environment, suppliers and employees, among others, without fearing a lawsuit by the shareholders, and also allowing companies to differentiate themselves from other companies. However, it is important for companies to be fully committed to creating these types of corporations. Since public accountability is a key element of both of these paths, companies must take into account the additional reporting requirements they will be forced to meet. At the same time, companies considering becoming a B corporation or flexible purpose corporation should note that these types of corporations provide no tax, investment or procurement incentives for benefit corporations.

If you have any questions and/or need help forming a B corporation, a flexible purpose corporation, or any other type of business entity, our Northern California business attorneys can help. You can contact one of our lawyers using our online contact form, or by calling us at 925-463-1073.

Sources

Business Entities, California Secretary of State

Benefit Corp Information Center

Certified B Corporation