New Types of California Corporations for 2012

If you are in a business where demonstrating your social responsibility is a competitive advantage, you may be interested in the two new types of corporations that California has authorized this year: Flexible Purpose Corporations and Benefit Corporations.  These new corporate forms fall between traditional for-profit corporations, whose primary purpose is to maximize shareholder value, and non-profit corporations, which can pursue public or charitable benefits, but cannot seek profits for shareholders.

The new forms allow you to have a for-profit business which is also designed to have public or environmental goals.  Each of them accomplishes this goal using a slightly different method.

Benefit Corporations

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.

Significantly, Benefit Corporations must measure their achievement of their public benefits against a third-party standard developed by an organization independent of the Benefit Corporation.  Benefit Corporations must annually report to their shareholders and to the public (on their public website) how they measured up against that third-party standard.

The major difference from ordinary corporations is that the officers and directors of a Benefit Corporation can seek to provide the stated public benefits, even where doing so would have a negative impact on shareholder profits.

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.

The Flexible Purpose Corporation 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.

Both of these new corporate forms allow the companies who select them to have a profit-seeking business, but also to balance that profit against other goals.  While having these stated goals may be a competitive advantage in some cases, that must be balanced against the additional reporting and other requirements that these new forms have.

If you have a business idea that might fit into one of these new categories, we are happy to help you with the formation.