California Creates Two New Business Entities

By Arlen Gunner

Governor Brown recently signed two new laws which have the effect of creating two new classes of corporations in California.  These laws give for-profit corporations the ability, in certain circumstances, to engage in activities that have been traditionally reserved for non-profit organizations.  These new corporations are called the flexible purpose corporation and the benefit corporation.

The Flexible Purpose Corporation (SB201)

A flexible purpose corporation is a corporation that designates in its articles of incorporation a special purpose, which may include charitable and other public purpose activities traditionally undertaken by nonprofit public benefit corporations.

A flexible purpose corporation permits its shareholders to designate its special purpose.  The special purpose designation allows the board of directors to consider not only the best interest of the corporation and the shareholders, but also whether the corporation's actions will further its special purpose.  The flexible purpose corporation is required to prepare an annual report which measures its success in carrying out its special purpose and report all material actions taken to carry out the special purpose.  It must also prepare a current report on expenditures made in pursuit of the special purpose if the expenditures will have a material adverse impact on the flexible purpose corporation's profits.  Current reports and portions of the annual report must be made publicly available on the corporation's website.  An existing corporation or other business entity may convert to a flexible purpose corporation by a two-thirds vote, subject to dissenters' rights.

The Benefit Corporation (AB361)

A benefit corporation must adopt the purpose of creating a general public benefit, which is defined as a material positive impact on society and the environment.  A benefit corporation may also adopt a specific public benefit from a list of seven categories identified in the law.  In carrying out their fiduciary duties, directors are permitted to consider the best interest of the benefit corporation, which is deemed to include the impact on employees, customers, shareholders, the community and society, and the environment.  In making its assessment, a benefit corporation must use a third-party standard selected by the boards of directors.  This corporation type must also prepare an annual benefit report explaining, among other things, whether the corporation pursued a general public benefit, the ways in which it pursued that public benefit, and the extent to which those benefits were created, as measured by the third-party standard.  The corporation's annual benefit report must be made publicly available through its website.  Existing corporations and other business entities may convert to a benefit corporation by a two-thirds vote, subject to dissenters' rights.

Whether or not there is an advantage to using either of these new corporations will have to be determined over time.  Both laws are very detailed additions to the Corporations Code and should be thoroughly reviewed.

  

SB201 relates to the Flexible Purpose Corporation and AB361 relates to the Benefit Corporation.  Both laws go into effect on January 1, 2012.  For more information or to evaluate the pros and cons of these new corporate structure, please contact me arg@vrmlaw.com