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Welcome to our April 2014 Newsletter!  Please take the time to read the article and contact us should you have any questions or concerns.

 

Law Offices of Salar Atrizadeh

Benefit Corporation v. Flexible Purpose Corporation

 

In general, corporations function under different state or federal laws. In fact, state laws define the types of corporations that can exist and the requirements they must fulfill.  Indeed, in some states, like California, there are several different types of corporations. For example, as of 2012, under the California Corporations Code, an entity may register as, or convert to, a flexible purpose or benefit corporation. These new forms of entities redefine how corporations function and their underlying purposes.  Do you conduct business as a corporation? Does your corporation serve non-traditional purposes, such as social and environmental interests? If so, the distinction between benefit and flexible purpose corporations may impact your business. You may contact us in order to discuss these different entities and related advantages or disadvantages.

 

A benefit corporation is a new way to organize a business entity that focuses its purpose on social and environmental performance rather than making a profit.  Maryland first adopted this structure and California followed thereafter. A flexible purpose corporation is an entity organized without a profit motive as well.  Instead, the corporation aims to pursue a social good, but with less stringent requirements than a benefit corporation.  All flexible purpose corporations must define at least one "special purpose" in their charters.

 

Benefit corporations and flexible purpose corporations are different in three ways.  First, benefit corporations are required to pursue a "general public benefit," which involves making positive contributions to society and the environment.  On the other hand, flexible purpose corporations only need to pursue a specific purpose with some positive effect on employees, suppliers, customers, creditors, community, society, or environment.  Second, a third party standard is applied against benefit corporations to measure their success. This is often an expensive and time-consuming process. It is meant to assess whether the benefit corporation is achieving its fundamental purpose towards the greater public good.  Flexible purpose corporations are not required to undergo this evaluation.  Third, benefit corporations must report their success, based on the third party standard, to the public and their shareholders.  Where flexible purpose corporations have reporting requirements, it is a less stringent reporting standard. Indeed, in some circumstances, flexible purpose corporations can waive the requirement to report to shareholders.

 

Benefit corporations are best for entrepreneurs or corporations that are truly dedicated to an underlying social and environmental purpose. The strict reporting requirements are in place to ensure that these entities remain true to this purpose. In turn, this prevents corporate executives from straying the organization towards ulterior motives. Likewise, flexible purpose corporations also aim to serve a greater good, but with lenient requirements that allow for other considerations.

 

For more information, you should consult with a qualified attorney.  At our law firm, we assist clients in legal matters by staying informed and using knowledge and expertise to create solutions.

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