Traditionally, shareholders restrict for-profit corporations to pursue only those social or environmental ventures that will produce long term economic gain. Although many shareholders will agree that philanthropy is good for a company’s image, many conscious corporations are still unable to take on as much as they would like. Under current corporate law, dissatisfied shareholders can file a lawsuit against directors that fail to maximize economic profit. As of January 1, 2012, California law authorizes the creation of two new types of corporations that seek to protect the social or environmental goals of a for-profit corporation–the “flexible purpose corporation” and “benefit corporation.”
Flexible Purpose Corporations
In a flexible purpose corporation, non-financial goals are outlined in the Articles of Incorporation and approved by a two-thirds shareholder majority. A purpose is formally defined as “any charitable or public purpose that a nonprofit would be eligible to carry out” or anything that promotes a positive or minimizes a negative impact on employees, suppliers, the community or the environment. These goals can range from being more environmentally conscious to social efforts such as hiring more disabled workers. The corporation must make available a public annual report detailing the actions taken to achieve the special purposes. This type of corporation helps for-profit companies who also want to make a positive impact.
Benefit Corporations
Benefit corporations harmonize elements of nonprofits and for-profit entities. Corporations with this legal status explicitly state their social or environmentally-conscious goals. They then turn in an annual report to the Secretary of State, assessing their progress against a third-party standard. The corporation must adhere to a certain standard in order to maintain their “benefit corporation” status. This corporate model is best for companies seeking low profits and high social or environmental benefits.
Effects of Flexible Purpose and Benefit Corporations
Creating or transitioning into one of these types of corporations has many benefits. With the passing of this legislation, existing companies are authorized to change their legal status with a two-thirds majority shareholder vote. These hybrid businesses have access to both conventional and philanthropic capital markets. Some existing nonprofits are threatened by the formation of these hybrid corporations. Executives of charities fear that these new entities create more competition for already-sparse philanthropic capital. Yet conversely, charities who felt limited by the philanthropic market are now able to change their corporation type to access more venture capital as well as pay higher employee compensation and create exit strategies. Despite the many benefits, there is some disagreement regarding the third-party standard that a benefit corporation must use to assess. In the annual report, the benefit corporation only has to provide the reason why they chose a specific standard. Although this standard does not have to be approved by the state in order to be used, there are loose guidelines that define a credible, transparent, and independent entity to create the standard.
Ready to convert to or set up a flexible purpose or benefit corporation? Contact me to get started.
