Effective January 1, 2012, California’s new Corporations Code Sections 2500 et. sq. and 14600 et. seq., allows formation of two new types of corporations, the Flexible Purpose Corporation, and Benefit Corporation.
Both statues allow the new corporate entities which while they are not non-profit, they do encompass both economic profit, as Social welfare and objective. Simply put, they are hybrids between traditional for profit corporation, and traditional nonprofits.
Flexible Purpose Corporation may pursue social welfare objectives without liability to directors or shareholders for not maximizing profit. However, one or more “special purpose” must be set forth in the Articles of Incorporation.
Why do we need Flexible Purpose Corporation? For one, in the past, some corporate entities with similar goals would have violated the business judgment rule, and therefore, this tie of corporate entity avoids the exposure. Second, over 30 states have already allowed these types of corporations, and California is now allowing these types of corporations.
Benefit Corporations permit corporate directors to take into account, and pursue general or more specific social welfare goals, in addition to the traditional profit motive, and will not be liable on account of pursuing these objectives for not maximizing shareholder return. Benefit Corporations do have a high degree of transparency requirement, but affords liability to Shareholders and Directors who wish to pursue a specific social welfare goals.
A word of caution for anyone interested in these two new types of corporate entities. These statutes, and new corporate entities are new, and untested in the Courts, and therefore, may not be feasible for everyone, and careful considerations must be made before deciding to form any of the new corporate entries.
Benefit Corporations have been available in some states, and there are more bills pending in other states to offer these new entities. Neither entity is tax exempt however.