In the midst of the Occupy Wall Street movement, California made a move to create a new type of corporation that could operate with the public good in mind. On October 11, 2011, then Governor Jerry Brown signed the Corporate Flexibility Act of 2011 (“Corporate Flexibility Act”), creating two new corporate forms, a “flexible purpose corporation” and a “benefit corporation.” Rather than focusing strictly on company profits, these types of corporations permit the entity to seek economic benefits while also prioritizing social objectives.
Prior to the introduction of these new corporate forms, corporations generally had to elect to file as a for-profit corporation or a non-profit corporation. These new corporate forms allow a company to fall somewhere in the middle, pursuing both a social purpose while also allowing the company to seek a profit.
The first new corporate form is called a “flexible purpose” or “special purpose” corporation. The “flexible purpose” corporation is generally set up like a traditional corporation; however, the articles of incorporation and share certificates must state that the company is organized as a flexible purpose corporation. Additionally, the articles must identify either a specific charitable or public purpose activity that the company is authorized to carry out, or the corporation will promote the community, society, or the environment.
A “benefit” corporation's articles of incorporation must state that the entity is a “benefit” corporation and that one of its purposes is to create a general public benefit. The corporation does not have to specifically designate the public benefit, but it may include benefits for the underserved or low-income communities, preserving the environment, promoting the arts, or improving health.
If a traditional C-corporation wanted to expand their corporate purpose to include social benefits or a flexible purpose, the Corporate Flexibility Act allows corporations to become a benefit corporation. This can be accomplished by amending the entity's articles of incorporation with a designation as a benefit or flexible purpose corporation and obtaining approval of a two-thirds vote of outstanding shares in each class of stock. Additionally, a benefit corporation can change to a C-corporation by amending their articles of incorporation with the same two-thirds approval.
However, despite the above-stated advantages, a benefit corporation may not always be the right choice for a company that has a limited interest in a social benefit. This is because a benefit corporation will have to consider the interests of the benefit in their decision-making and carrying out the duty of each office, which includes the long and short-term interests of the corporation factoring in the benefit.
For companies that include a social or public benefit in their mission statement, benefit or flexible purpose incorporation may be the ideal vehicle to accomplish the company's stated social goals. Unlike a typical C-corporation, the shareholders' interests are no longer treated as primary to the other interests in a benefit corporation. Thus, where social benefits could contrast with the company's economic bottom line, a benefit corporation could consider the social benefits and costs in addition to the economic costs, and would not have to make a decision based solely on financial gain. A flexible benefit corporation may be a viable option for many companies that are looking to include a social welfare mandate in their business model.
If you are looking to establish a corporation with a social and economic purpose, a benefit or flexible purpose corporation may be right for you. At Butterfield Schechter LLP, our firm can help you and your San Diego company prepare for a successful future while providing a social benefit. Contact our office today with any questions on how we can help you and your business succeed.