On January 1, 2012, California became the first state in the country to authorize a Flexible Purpose Corporation. This entity form is similar to that of a benefit corporation, but with a few distinctions.
Basics
California Senate Bill 201 created the Flexible Purpose Corporation by adding appropriate provisions to the California Corporations Code. The basic principle behind this corporate form is essentially the same as that of a Benefit Corporation: to give directors the opportunity to simultaneously pursue public purposes and shareholder profit maximization by adhering to the following:
- The usual charitable/public purpose activities of a nonprofit corporation;
- Promoting positive effects or reducing adverse effects upon the environment, community at large or the flexible purpose corporation’s employees, suppliers, customers, and creditors.
The new law authorizes a flexible purpose corporation to convert into a nonprofit corporation, a corporation, or another domestic business entity. The law requires the board of directors to specify objectives for measuring the impact of the flexible purpose corporation’s efforts relating to its special purpose, and to include an analysis of those efforts in annual reports, together with specified financial statements, to shareholders and would require specified information to be made publicly available, as specified. The law also provides that a flexible purpose corporation is subject to many existing provisions of the Corporations Code.
To change the purpose(s) of a flexible purpose corporation, a 2/3+ vote of the outstanding shares is needed. The directors will not be responsible to anybody other than the corporation itself and its shareholders for failure to achieve or pursue the special purposes.
Benefits and Drawbacks
It is difficult to say at this point whether the new entity form is better than the benefit corporation or a nonprofit organization because much of it is going to depend on how exactly those entities will be taxed and whether other states that currently do not flexible corporations will recognize them. Generally speaking, shareholders that are not comfortable having too broad of a social purpose to pursue, will probably prefer the possibility of a narrower focus of a flexible purpose corporation over that of a benefit corporation.
Pros:
- May simultaneously pursue profit and socially important purposes.
- Directors are shielded from personal liability.
- Existing corporation may convert into a B Corp by amendment to articles of organization, merger or reorganization.
Cons:
- Potential recognition problems in other states that currently do not have this corporate form.
- Potential for abuse, if directors try to hide own business incompetence and try to justify losses with the pretense of pursuing social interests rather than profit.