As of January 1, 2012, California businesses have two interesting new options to consider when forming: the Benefit Corporation and the Flexible Use Corporation. This post is the first in a series that will cover what these entities are, pros and cons of each entity, and other questions about the new laws.
The newly-created Benefit Corporation is a hybrid of a traditional corporation and a non-profit organization. While a traditional corporation can take on a socially responsible or environmental cause, it ultimately has to create profit with all of its decisions. If not, directors expose themselves to lawsuits from unhappy shareholders. Conversely, non-profits must ensure their actions do not result in excess profits, which can cost them their tax-exempt status. Now, directors of a Benefit Corporation can simultaneously pursue socially responsible and profitable ends without either risk.
Three major concepts embody the Benefit Corporation: a beneficial purpose, accountability, and transparency. As to the beneficial purpose, a Benefit Corporation must state in its organizational documents that it is “formed for the purpose of creating general public benefit,” defined as “a material positive impact on society and the environment, taken as a whole, as assessed against a third party standard.” This is an somwhat vague definition. But, the law lists several categories of specific, legitimate public benefits, including: providing low-income or underserved people with beneficial goods or services, promoting economic activity for those groups beyond normal job creation, preserving the environment, improving human health, promoting arts and sciences, and increasing capital flows to entities with a public benefit purpose.
Second, the law holds a Benefit Corporation accountable to interests beyond shareholders. Directors must consider the impact of the company’s actions and proposed on its employees and the employees of subsidiaries or suppliers, the interests of customers as beneficiaries of the beneficial purposes, community and stakeholder interests, the local and global environment, and other any other identified beneficial goals.
Third, a Benefit Corporation must disclose to shareholders an annual benefit report of how the company’s overall corporate social and environmental performance matched up to third-party standards. Beyond the financial data contained in traditional disclosures, the annual benefit report contains detailed descriptions of what the company did to attain its general or specific public benefit, whether directors believe the company attained that benefit and if not, why not, and an explanation of the standards the company uses to evaluate itself, and why it picked those particular standards.
The Benefit Corporation stands to provide a valuable means for companies that espouse the motto of “doing well while doing good.” Already, about one dozen companies have applied to convert to Beneficial Corporation status in California, and several other states have already enacted similar laws. As with any new law, there are legal uncertainties, but we look forward to seeing how forming Beneficial Corporations in California will change the economic landscape. Contact us to see how your company can convert to a Benefit Corporation today.