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Flexible Purpose Corporation vs. Benefit Corporation

September 04, 2012

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As of January 1, 2012, a company may be formed as (or converted to) a for-profit Flexible Purpose Corporation or Benefit Corporation under California Corporation Code Sections 2600 & 14600 et. seq., respectively.  This gives the entrepreneur the recognition of being a "socially conscience" company, as well as the benefit of being a "for-profit" enterprise.

Why Two?

As discussed below, Benefit Corporations tend to be more restrictive and document intensive than Flexible Purpose Corporations, and therefore, with the help of an experienced team of California corporation lawyers, the Flexible Purpose Corporation came into existence, which features relaxed qualifying and reporting requirements.

Benefit Corporations differ from Flexible Purpose Corporations in three (3) material ways: 

(1) Benefit Corporations are required to pursue a General Public Benefit – a "material positive impact on society and the environment, taken as a whole".  Flexible Purpose Corporations, on the other hand, need only pursue a specific purpose that has a positive effect on any of the following:  its employees, suppliers, customers, creditors; the community and society; or the environment.

(2) Benefit Corporations are required to gauge their success based on an independent third party standard (which can be costly and time-consuming).  No such standard is required for Flexible Purpose Corporations.

(3) Benefit Corporations are required to provide to its shareholders every year (and to the public via its website) a comprehensive assessment of its activities in support of its purpose, as measured against the above-mentioned third party standard.  Flexible Purpose Corporations, on the other hand, may waive the shareholder reporting requirements under certain circumstances, and where reporting is required, the annual report is far less onerous on company resources.

So what do I get by forming a Benefit Corporation instead of a Flexible Purpose Corporation?

Benefit Corporations are formed for the entrepreneurs that are truly committed to the environment, or are seeking investors that are truly committed to the environment.  The laws are created such that owners of Benefit Corporations are held accountable for their stated (sustainable) purposes, with extensive reporting requirements and shareholder oversight.  In contrast, the "watered down" requirements of Flexible Purpose Corporations will likely make Flexible Purpose Corporations far more commonplace in California.  The downside is that Flexible Purpose Corporations will undoubtedly become more susceptible to "greenwashing", which may in turn erode the underlying purpose and benefits of the entity over time.

 

For more information, please contact:

Derek Ridgway

925-746-8484 Direct Phone
925-746-8493 Fax

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