New Corporate Forms in California

As of January 1, 2012, there are two new subtypes of stock corporations in California: a Flexible Purpose Corporation and a Benefit Corporation. This article provides a brief overview of these corporation types.

WHAT IS A FLEXIBLE PURPOSE CORPORATION?

Purpose: A Flexible Purpose Corporation (FPC) is a for-profit corporation that may also pursue environmental or other public purpose objectives. Nonprofit corporations often prove inadequate for “social entrepreneurs” because the Internal Revenue Code and regulations severely restrict the for-profit activities of a nonprofit corporation, and the process of seeking tax-exempt status can be prohibitively lengthy. On the other hand, the two business forms available to for-profit entrepreneurs—the corporation and the limited liability company—have downsides when social objectives are combined with profit-making goals. These downsides are especially problematic when traditional investment capital is sought. A FPC integrates the “for profit” aspect of a traditional corporation and the charitable purpose of a non-profit corporation by allowing the corporation to have a flexible purpose which is stated in the articles of incorporation. Additionally, a flexible purpose corporation enables the board of directors to pursue a social object without the threat of a shareholders’ lawsuit for not maximizing profit.

Governing Law: FPCs are governed by the Corporate Flexibility Act of 2011 (CFA), codified in the California Corporations Code (CA Corp. Code §§ 2500–3503). However, except as otherwise expressly provided in the CFA, an FPC is subject to the General Corporation Law (CA Corp. Code. § 100 et seq.) that governs all other for-profit corporations. [CA Corp. Code § 2501]

Specific language must be included in the articles of incorporation for the FPC such as, including, but not limited to, the words “flexible purpose corporation,” or an abbreviation of those words, and the articles must meet other statutory requirements. As set forth below, there are also other formational, operational and reporting requirements.

Taxed as Corporation: Although an FPC may combine environmental or other public purpose objectives with profit-making objectives, it has no special tax benefits: An FPC is taxed as a for-profit corporation under both federal and California tax law.

WHAT IS A BENEFIT CORPORATION?

Purpose: A Benefit Corporation is a for-profit corporation which also must have the purpose of creating a “general public benefit”—i.e., “a material positive impact on society and the environment, taken as a whole, as assessed against a third-party standard.” The creation of this general public benefit, and any specific public benefit, is deemed to be in the corporation's best interests. [(CA Corp. Code §§ 14601(c) (emphasis added), 14610(a),(c)] The articles of incorporation for a Benefit Corporation must state that the corporation is a Benefit Corporation and must identify a specific public benefit, which, in the Corporations code, includes the following:

1.    Providing low-income housing or underserved individuals or communities with a beneficial product or service.
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.

As set forth below, there are also other formational, operational and reporting requirements.
Governing Law: FPC’s are organized under the General Corporation Law that elects to become subject to Corporations Code (CA Corp. Code §§ 14600–14631). [CA Corp. Code § 14600(a)] The provisions of the General Corporation Law continue to apply to Benefit Corporations “except where those provisions are in conflict with or inconsistent with” Corporations Code section 14600 et seq.

Legislative Purpose: Prior to 2012, the General Corporation Law lacked a framework for corporations to organize and operate for a public benefit purpose greater than simply pursuing profit or a limited objective of corporate social responsibility. The proponents of the benefit corporation legislation envisioned building a new sector of the economy that uses the power of business to solve social and environmental problems. The Benefit Corporation framework provides “an alternative corporate structure with higher standards of corporate purpose, accountability, and transparency.” It was created for entrepreneurs and investors who want to build businesses “with an eye toward the triple bottom line of people, planet, and profit.” [Assembly Judiciary Committee Analysis of AB 361 (5/2/11); Senate Banking & Financial Institutions Committee Analysis of AB 361 (6/24/11)]

Taxed as Corporation: Although a Benefit Corporation may combine public benefit with profit-making objectives, it has no special tax benefits: A Benefit Corporation is taxed as a for-profit corporation under both federal and California tax law.

Different from Business Corporations: A Benefit Corporation differs from a C (or business) Corporation in that, in addition to making a profit, a Benefit Corporation has the purpose of creating a specific public benefit (pursuant to California Corporations Code § 14601(e).) It also differs from a Non-Profit Corporation in that one of its purposes is to pursue a profit, in addition to providing a specific public benefit.

Relationship to Flexible Purpose Corporations: Benefit Corporations and Flexible Purpose Corporations grew out of competing proposals. As the Corporate Flexibility Act was being drafted, a number of persons became dissatisfied with its provisions, and proposed the benefit corporation as an alternative. Although the respective proponents tried to persuade the Legislature that two discrete types of for-profit “public benefit” corporations would result in confusion, both types were ultimately enacted, which may result in confusion between the two types.

(Sources for the above information include: California Secretary of State Website, www.sos.ca.gov, Business Entities; California Corporations Code, as referenced; and The Rutter Group, CA CORPS CH 9.)

PRACTICE POINTS: There are a number of formational and operational issues when considering either one of these new corporation types, such as, including but not limited to, the articles and the stock certificates must include certain specific language, there are specific reporting requirements, directors and officers may have additional duties, there may be specific enforcement proceedings, and so on. There are also uncertainties and unresolved issues arising out of the new legislation, which means the use of these new entities may entail some risks. “Nevertheless, various studies have shown that companies that take into account broad social and environmental concerns perform far better financially in the long run than companies that focus exclusively on monetary profits.” (The Rutter Group, CA CORPS CH. 9(I)-A, § 9.8.)

You need to consult with an attorney if you have specific legal questions or concerns. You should also consult with a tax advisor. We would be happy to assist with the legal questions or concerns.

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