Flexible Purpose Corporation
As of January 1, 2012, California added two new subtypes of stock corporations: the flexible purpose corporation and the benefit corporation. Flexible purpose corporations permit companies to pursue both economic profit and social objectives. Traditionally, an organization needed to be either nonprofit or for-profit. This new stock corporation subtype will allow for a hybrid of nonprofits and for-profits.
One of the primary benefits is that directors receive better protections from liability. Directors under a traditional for-profit corporation have a fiduciary duty to maximize profits for shareholders. Hence, directors are cautious with their investments and will generally not pursue social or environmental benefits out of the fear that they may be liable for not maximizing profits. Although the directors may be protected under the legal defense "business judgment rule," the concern of dealing with any potential liability pushes directors to be very risk-adverse. The flexible purpose corporation allows for better protections against liability by requiring the corporation to have a special purpose. There are different qualifiers that determine a special purpose, but generally, they are similar to a charitable purpose found in a traditional nonprofit corporation.
Like every corporation, a flexible purpose corporation has a handful of formalities. According to California Corporations Code Section 2602, the flexible purpose corporation requires the corporation to engage in one or more of the following purposes:
(A) One or more charitable or public purpose activities that a nonprofit public benefit corporation is authorized to carry out.
(B) The purpose of promoting positive short-term or long-term effects of, or minimizing adverse short-term or long-term effects of, the flexible purpose corporation's activities upon any of the following:
- The flexible purpose corporation's employees, suppliers, customers, and creditors.
- The community and society.
- The environment.
Moreover, the flexible purpose corporation must have one of the following statements in their articles of incorporation:
(A) "The purpose of this flexible purpose corporation is to engage in any lawful act or activity for which a flexible purpose corporation may be organized under Division 1.5 of the California Corporations Code, other than the banking business, the trust company business or the practice of a profession permitted to be incorporated by the California Corporations Code, for the benefit of the long-term and the short-term interests of the flexible purpose corporation and its shareholders and in furtherance of the following enumerated purposes ____."
(B) "The purpose of this flexible purpose corporation is to engage in the profession of ____ (with the insertion of a profession permitted to be incorporated by the California Corporations Code) and any other lawful activities, other than the banking or trust company business, not prohibited to a flexible purpose corporation engaging in that profession by applicable laws and regulations, for the benefit of the long-term and the short-term interests of the flexible purpose corporation and its shareholders."
In addition to these formalities, a flexible purpose corporation has more stringent annual reporting requirements and the name of your corporation must include the words "flexible purpose corporation" or an abbreviation thereof. Although there are a lot of formalities to reach proper compliance, we are here to help and will do all of that work for you. It is important to note that this is a new corporate entity and, therefore, there is very little case law on point to help interpret how the laws will play out. Contact our business law attorney to learn more about the flexible business corporation and for help in determining whether this could be a good option for your company.
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