New Corporations in California: Flexible Purpose and Benefit Corporations

California law now allows you more options when forming your business entity.  Instead of a standard, for profit corporation, you have two more new corporation choices: 1) the Flexible Purpose Corporation; and 2) the Benefit Corporation.

Governor Brown recently signed into law two bills that will allow California corporations to pursue “social or environmental goals” while at the same time focusing on the monetary earnings of their shareholders.  Both laws took effect on January 1, 2012.  In the past, the only option was a “for-profit corporation” (which is a standard corporation) where directors and officers had to make decisions based on what would best benefit the shareholders, even if it was at the expense of things like the environment or benefits to the public at large.

The Corporate Flexibility Act of 2011 is one of these new laws.  This Act allows for the formation of a new kind of corporation, referred to as the “Flexible Purpose Corporation.”  The directors of a Flexible Purpose Corporation choose one “special purpose,” such as providing products or jobs to an underprivileged community, and then the corporation must work to meet the goals associated with that purpose.  In its Articles of Incorporation, a Flexible Purpose Corporation must state its precise purpose and must outline the goals to be achieved.  It must also publish an annual report disclosing its progress in achieving those goals.

The second law, known as Assembly Bill 361, allows for the creation of a similar, but slightly different type of corporation, the “Benefit Corporation.”  In its Articles of Incorporation, the Benefit Corporation must describe one or more particular public benefits that would be the focus of the corporation.  Another defining element of Benefit Corporations is that in addition to listening to shareholders, the directors and officers must take the needs of the community, the environment, employees, and other groups associated with the corporation into account when making decisions.  And, in order to maintain this status, Benefit Corporations must go through periodic assessments by a third party to measure the corporation’s impact on society and the environment.

Both Flexible Purpose Corporations and Benefit Corporations are considered “hybrids” of for profit and nonprofit entities.  They are certainly “for-profit” entities, but they provide protection to directors and officers who pursue socially or environmentally beneficial objectives instead of making decisions solely based on projected corporate profits.  In the past, directors and officers would be subject to liability if unhappy shareholders saw the corporation’s purpose sway from maximizing profits, regardless of the reason.

If you already have a for profit corporation, and wish to convert to one of these new entities, you are able do to so.  An existing corporation can become either a Flexible Purpose Corporation or a Benefit Corporation, with a two-thirds’ shareholder vote.  If you have any questions about these new corporations or are interested in forming one, please contact us.