As of January 1, 2012, California added two new subtypes of stock corporations: the flexible purpose corporation and the benefit corporation. Both of these entities were established with the goal of creating hybrid entities: a hybrid between for-profit entities and non-profit entities. These new “hybrids” are designed to allow entrepreneurs and investors to organize stock corporations that can pursue both economic and social objectives. We previously discussed the new Flexible Purpose Corporation. Today, we discuss the new Benefit Corporation.
General and Specific Public Benefit Purposes
A Benefit Corporation must pursue the “general public benefit” purpose or any specific public benefit purpose as determined by the Articles of Incorporation. “General public benefit” means “a material positive impact on society and the environment.” “Specific public benefit” includes all of the following:
- Providing low-income or underserved individuals or communities with beneficial products or services.
- Promoting economic opportunity for individuals or communities beyond the creation of jobs in the ordinary course of business.
- Preserving the environment.
- Improving human health.
- Promoting the arts, sciences, or advancement of knowledge.
- Increasing the flow of capital to entities with a public benefit purpose.
- The accomplishment of any other particular benefit for society or the environment.
Expanding Fiduciary Duties of Directors
The Benefit Corporation also expands the fiduciary duties of directors of the corporation. For-profit corporations have fiduciary duties that essentially require directors to maximize shareholder value. This requirement of for-profit directors to maximize shareholder value frequently prevents them from investing in social objectives due to the fear of potentially being sued for breach of fiduciary duty. With a Benefit Corporation, the directors no longer have to fear being sued for breach of fiduciary duty because they are affirmatively required to consider the pursuit of general and specific purposes as described above. Therefore, the new Benefit Corporation encourages directors to pursue social objectives.
Reporting Social and Environmental Performance
Long gone are the days where for-profit entities would claim to be socially responsible businesses without any proof. Benefit Corporations are required to report standards to ensure these entities are in fact socially responsible. The Benefit Corporation is required to report it’s overall social and environmental performance. The standard is a comprehensive assessment of the impact of the business and the business’s operations upon considerations set by statute. Corporations Code § 14601. The performance is assessed by an independent third-party entity that has no material financial relationship with the Benefit Corporation.
Standards Not Met
If the standards are not being met for the Benefit Corporation, the new Corporations Code Section specifically provides for relief through a benefit enforcement proceeding. This proceeding may relate to any of the following:
- Failure to pursue the general public benefit purpose of the benefit corporation or any specific public benefit purpose set forth in its articles.
- Violation of a duty or standard of conduct imposed on a director pursuant to this part.
- Failure of the benefit corporation to deliver or post an annual benefit report as required by Section 14630.
As you can see, the new Benefit Corporation has the potential to dramatically improve social objectives. Anyone who had the desire to make their corporation more socially responsible, may now do so without the constant fear of breaching fiduciary duties. If you want help determining the best business entity for you or would like to learn more about Benefit Corporations, contact our Sacramento business law attorneys to set up a consultation. Also, check out the new section in the Corporations Code detailing the Benefit Corporation for yourself: California Corporations Code sections 14600-14631
By: Trevor Carson Google
*There are a handful of corporate formalities. The formalities listed in this post are to give you an idea of what to expect. The information provided in this post does not constitute legal advice or opinion. The information is for guidance purposes only. Individual situations vary and you should contact us for a consultation. Image: FreeDigitalPhotos.net