California Benefit and Flexible Purpose Corporations: What You Need to Know

A few years ago, California followed the trend and created two new types of for-profit corporate entity whose mission includes making positive impact on society and the environment. A corporate attorney near San Jose can help ensure that such a corporation meets its legally defined goals. You should meet a business law firm about starting a one of these types of corporations if your entrepreneurial interests include having your business help solve social and environmental challenges. corporate business law

What are they?
California created two types of corporations that allow directors to manage with a focus on goals other than exclusively profit maximization. The “Benefit Corporation” and “Flexible Purpose Corporation” have a number of common attributes.

First, each must adopt a public purpose. Each type has a slightly different take on defining the public purpose, but each essentially allows the corporation to create a positive impact, or promote efforts benefiting, the environment or society.

Second, each must be accountable. Here, there is a real difference between the two. In the Benefit Corporation, the Board is required to consider environmental and social factors in its actions and operations, as well as profits. In the Flexible Purpose Corporation, the Board may, but is not required to, consider the corporation’s purpose in its decisions.

Third, each must be transparent. This transparency is provided through annual reports to the shareholders on its social impact. The Benefit Corporation must report annually to shareholders on it environment and social performance using standards that are created by independent third-parties. In a Flexible Purpose Corporation, a “Special Purpose Management Discussion and Analysis” must be created and distributed which identifies and discusses the short-term and long-term objectives of the corporation relative to its special purpose, and any change made in the fiscal year. There are a number of further detailed requirements for this document.

Unlike setting up a traditional corporation, directors can consider issues other than shareholder value maximization. The use of social goals can provide important marketing benefits.

As your corporate lawyer will explain, establishing a business corporation results in expanded reporting requirements. These reporting requirements are far in excess of those that are typically performed by small closely held businesses, and will increase administrative and legal expenses.

Should you form one?
You should consider whether the marketing and other benefits associated with these types of corporations are worth the additional burdens. Likely, the type of industry you are in will be a strong consideration. These types of corporations, however, can be highly successful, as the recent initial public offering of Etsy shows.