Flexible Purpose and Benefit Corporations

The California legislature, effective as of 2012, created two new types of corporations.  One is called the “flexible purpose corporation” and the other type is the “benefit corporation.”  Both types of corporations allow management to pursue not only for-profit purposes but also corporate purposes that are not strictly for-profit.  Both new types of corporations are generally subject to most of the corporate laws and regulations that govern regular for-profit corporations.  The main difference is in how each new type of corporation is established and what purposes each can or must pursue.

The flexible purpose corporation must include in its name the words “flexible purpose corporation” or an abbreviation of such words (such as FPC).  The articles of incorporation, in addition to the general purpose statement, must also contain language as set forth in the Corporations Code regarding the ability of the FPC to engage generally in charitable or public benefit purpose activities.  The corporation must then specify in its articles of incorporation what specific charitable or public benefit purposes the corporation can further.  Such specific purposes can be to “promote positive . . . effects of” or “minimize adverse . . . effects of” the corporation’s activities on its employees, on society or the environment.  Notwithstanding the specific purpose set forth it its articles, but except to the extent a charitable trust has been created by the corporation, the assets of the FPC are not deemed to be held for the benefit of any party other than its shareholders.

As you can see, the FPC gives the management of what is otherwise a for-profit corporation the ability undertake activities that are not directly adding to the investors’ bottom line.  Instead, the management of an FPC can pursue, in addition to the for-profit goals, those special purposes, such as promoting a charitable or public purpose or furthering the wellbeing of its employees, communities or the environment, that are set forth in the articles of incorporation.

A benefit corporation is similar to an FPC except that a benefit corporation elects to undertake the specific public benefit activity as a required corporate purpose.  Such purposes include, for example, providing beneficial products and services to underserved communities or promoting arts or sciences.  Furthermore, if the benefit corporation does not pursue its public benefit purpose it will be subject to enforcement proceedings.  And because the benefit corporation is under an obligation to pursue its public benefit purpose, there are certain reporting requirements of the benefit corporation that include an annual report to its shareholders that describes how the corporation promoted its public benefit purpose.

In summary, each of these new types of corporations is intended for specific use.  The general business owner will likely not be interested in these types of corporations.  However, if the nature of the business will create a natural fit with some sort of charitable purpose or public benefit, one of these entities could be the most appropriate corporate structure to establish.  The FPC is a flexible structure that allows, but does not require, promotion of the charitable or public benefit purpose.  Whereas the benefit corporation is a bit more focused and will require the corporation to pursue the public benefit purpose it has elected to promote.

This discussion is not legal advice, a solicitation of you as a client, nor the engaging in the practice of law in any jurisdiction.  This discussion is merely for information/education and should not be relied upon for legal advice by anyone because the facts discussed may be different from your own situation.  If you need legal advice, consult a qualified attorney.  For more information please visit my website at www.palacioslawoffice.com.

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About Elio Palacios, Jr.

Attorney Elio Palacios, Jr., represents individuals, corporations, entrepreneurs, small businesses, startups and early stage businesses, physicians, dentists, and healthcare businesses in corporate, business and commercial transactions and litigation. He also counsels employers and individuals on visa, immigration and naturalization matters. Visit www.PalaciosLawOffice.com to learn more.
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