The Benefits of California Benefit Corporations

Some individuals may want to utilize a corporation to earn a profit. Others may want to utilize a corporation to benefit society. And still others may want to utilize a corporation to do a little bit of both. For individuals seeking financial gain, there is the for-profit corporation. For individuals seeking to benefit society, there is the non-profit corporation. But what about individuals who want to pursue both for-profit and non-profit objectives? A for-profit corporation is not suitable because directors and officers of for-profit corporations have a duty to maximize shareholder value and risk liability if they make decisions that place the interests of non-shareholders (i.e. the public) over their shareholders’ financial interests. Likewise, a non-profit corporation is not suitable because non-profit corporations cannot distribute its profits to its shareholders. The solution?

The California Benefit Corporation Law, as created by the Corporate Flexibility Act of 2011, California Corporations Code sections 14600-14631, provides for a “benefit corporate” form specifically designed to enable corporations to simultaneously pursue both for-profit and non-profit objectives. In some ways, it is like the traditional corporation. For example, a benefit corporation may elect to be a subchapter “C” or a subchapter “S” corporation for tax purposes. In addition, a benefit corporation is incorporated in the same manner as a traditional corporation and is subject to the provisions of California’s general corporation law, except where the California Benefit Corporate Law specifically provides otherwise. Three main features differentiate benefit corporations from the traditional corporation: 1. General public benefit; 2. Accountability; and 3. Transparency.

General Public Benefit

To promote general public benefit, the California Benefit Corporation Law requires that a benefit corporation must have a purpose of creating a general public benefit, which is defined as having a “material positive impact on society and the environment, taken as a whole, as assessed against a third-party standard, from the business and operations of a benefit corporation.” [Cal. Corp. Code Sec. 14601(c)]. Under California law, a “specific public benefit” includes the following:

  • Providing low-income or underserved individuals or communities with benefit 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; and
  • The accomplishment of any other particular benefit for society or the environment.

[Cal. Corp. Code Sec. 14601(e)]

Accountability

To promote accountability, the California Benefit Corporation Law requires that a benefit corporation must assess its overall social and environmental performance on a yearly basis against a third-party standard for defining, reporting and assessing overall corporate social and environmental performance, which takes into account the impact of the benefit corporation’s operations on:

  • The benefit corporation’s shareholders;
  • The benefit corporation’s employees;
  • The benefit corporation’s customers as beneficiaries of the general or specific public benefit;
  • Community and societal factors;
  • Local and global environmental interests;
  • The benefit corporations short-term and long-term interests; and
  • The benefit corporation’s ability to accomplish its general and specific public benefits.

[Cal. Corp. Code Sec. 14061(g)(1)]

A benefit corporation’s adopted third-party standard must be developed by an independent entity that has “no material financial relationship with the benefit corporation or any of its subsidiaries.” [Cal. Corp. Code Sec. 14601(g)(2)] However, the benefit corporation is not required to be independently certified by the independent entity that created the third-party standard that the benefit corporation adopts. [Cal. Corp. Code Sec. 14630(a)(2)] Information such as the criteria used in measuring overall social and environmental performance, the relative weightings assigned to criteria used and other information used in a benefit corporation’s adopted third-party standard must be made publicly available. [Cal. Corp. Code Sec. 14601(g)(4)]

A public benefit enforcement proceeding can be brought against the directors and officers of a benefit corporation for violating their duties regarding the benefit corporation’s benefit interests and purposes. Such proceeding can be brought by the benefit corporation itself, or derivatively by a shareholder, a director or a person or group owning 5 percent or more in corporate equity. Damages are limited to injunctive relief. [Cal. Corp. Code Sec. 14623]

Transparency

To promote transparency, the California Benefit Corporation Law requires that a benefit corporation must produce an “Annual Benefit Report” outlining the benefit corporation’s performance in accomplishing its public benefit goals and the benefit corporation’s third-party standard. [Cal. Corp. Code Sec. 14630(a)] The report must be sent annually to shareholders and must be publicly available via the benefit corporation’s website. [Cal. Corp. Code. Sec. 14630(b) and (c)]

Becoming a Benefit Corporation

As stated above, the procedure for incorporation of a new benefit corporation is the same as for a traditional corporation. An incorporator must file Articles of Incorporation with the California Secretary of State, which must include the following statement: “This corporation is a benefit corporation.” [Cal. Corp. Code Sec. 14602] All stock certificates of the benefit corporation must identify the corporation as a benefit corporation. [Cal. Corp. Code Sec. 14631]

An existing corporation seeking to become a benefit corporation may amend its Articles of Incorporation to add the aforementioned language or merge into a benefit corporation. Under the California Benefit Corporation Law, the consent of two-thirds of all current shareholders is required. [Cal. Corp. Code Sec. 14603 and 14601(d)] Shareholders who vote against the amendment or merger have the right to require the corporation to purchase their shares at fair market value. [Cal. Corp. Code Sec. 14603(a)]

Conclusion

The California benefit corporation structure supports pursuit of the dual mission of profits and social good. This duality of mission will likely make the California benefit corporation a compelling option for social entrepreneurs.

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If you would like more details about California benefit corporations, please contact a member of Glaser Weil Fink Jacob Howard Avchen & Shapiro LLP’s Tax Group for more information.

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