What is a California Benefit Corporation?

What is a California Benefit Corporation?

By Jeremy Chen

Created by the Corporate Flexibility Act of 2011, the California Benefit Corporation is a corporate form specifically designed for social enterprises to pursue both for-profit and non-profit objectives. Benefit Corporations allow corporate officers and directors to take into account the triple bottom line of profit, people, and planet when making business decisions. It is currently available as a corporate form in the District of Columbia and in 16 states, including California.

So what exactly is a California Benefit Corporation? In some ways, it is like the C corporation. For example, it is taxed the same as a traditional corporation. The differences, however, are what define the California Benefit Corporation.  Three main features differentiate it from the C corporation:

1.  Public Benefit Purpose Required

A Benefit Corporation’s articles of incorporation must state that the corporation is a Benefit Corporation, and that one of its purposes is to create a general public benefit. As such, a company obligates itself to create a general public benefit by becoming a Benefit Corporation. A Benefit Corporation may additionally include any “specific public benefit” adopted by the corporation in its articles.

2.  Corporate Governance – Greater Protection for Directors from Shareholders to Pursue the Triple Bottom Line

The Benefit Corporation provides greater protection to its officers and directors to pursue objectives that benefit society, the environment, and the corporation’s employees (a.k.a. the triple bottom line of profits, people and planet). These protections are manifested in two ways:

First, shareholders’ interests are no longer treated as primary to other interests. In a C corporation (and Social Purpose Corporation), directors must perform their duties in good faith in the best interests of the corporation and its shareholders. If the directors fail to do so, shareholders may bring a derivative lawsuit against the directors. Directors of a Benefit Corporation have the same obligation to act in the best interests of the corporation, but the interests of shareholders are not given priority over other stakeholder interests; and directors must also consider the stakeholder interests of employees, customers, ability to accomplish its public benefit purposes, and other interests.

Second, since directors of a Benefit Corporation must consider the many interests mentioned above in its decisionmaking, those considerations are automatically deemed to be in its best interests. In comparison, directors of a C corporation do not have to take the other considerations into account; but if they do, they may expose themselves to a shareholder derivative suit since considering those factors is not automatically deemed to be in the best interests of the corporation and its shareholders.

3.  Transparency and Accountability Enforcement

Another major feature of Benefit Corporations is its built-in mechanisms to enforce transparency and accountability. These mechanisms are also discussed in “Accountability: How Benefit Corporations and Social Purpose Corporations Differ”

               Third-Party Assessment Standard

Benefit Corporations are required to measure their overall social and environmental performance against a third-party standard. The standard adopted by a Benefit Corporation must meet certain statutory requirements, which an attorney can help review and determine. Generally, the standard must evaluate the Benefit Corporation’s impact on certain interests, and be created using necessary expertise by an independent organization that does not have significant financial ties to the Benefit Corporation. The Benefit Corporation, however, does not need to be independently certified by the organization that created the standard that it adopts.

                Annual Benefit Report

To promote transparency, Benefit Corporations must produce an “Annual Benefit Report” outlining its performance in accomplishing its public benefit goals. This report must include the performance assessment discussed above, and it must be made available online via the Benefit Corporation’s website.

                Benefit Enforcement Proceeding

Lastly, a public benefit enforcement proceeding can be brought against the directors or officers for violating their duties regarding the Benefit Corporation’s benefit interests and purposes. This 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, and money damages are not available.

In closing, the Benefit Corporation is markedly different from the C corporation in its commitment to social and environmental goals. Social entrepreneurs should be committed in their missions before deciding to incorporate as a Benefit Corporation because it requires commitments to many different interests beyond profit maximization.

This corporate form is not appropriate for every company because there are many complex considerations to take into account. As such, it is always best to consult an attorney and other experts to assist you in making the best decision for your company.

Disclaimer. The information in this article is not legal advice, and is provided only for informational purposes. This article is only a general discussion, and does not include all relevant information regarding the topics and issues addressed within it.

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