Best Practices to Form a Benefit Corporation or Flexible Purpose Corporation in California

California now allows two new stock corporation subtypes, a benefit corporation and a flexible purpose corporation. The new subtypes went into effect January 1 of this year and help entrepreneurs and investors who want to fulfill economic and social goals that these corporation subtypes permit. This will help corporations be shielded against litigation from shareholders who assert that charity and other social efforts have devalued or diluted the stock value. That said, it does not eliminate or limit liability due to other acts or omissions.

The new subtypes help bridge the gap between solely for-profit, traditional corporations and nonprofit corporations that purely promote social benefits. Many entrepreneurs want to have social or green initiatives and be able to raise venture capital, which these new subtypes now allow. An already existing company that wishes to convert to such a subtype must have 2/3 of its shareholders vote to become one.

An experienced entity formation attorney or business incorporation attorney can help entrepreneurs and investors explore the pros and cons of each subtype, and counsel on how they affect debts, obligations, and liabilities.

The new subtypes must include additional statements in the Articles of Incorporation. The specific public benefits that the benefit corporation will be organized around must be specified. This can include:

-helping low income or under-served populations with products or services that benefit them

-promoting economic opportunity beyond creating jobs for people and communities

-environmental preservation

-improving human health

-promoting the sciences, arts, and knowledge

-increasing capital flow to entities that have a public benefit purpose

-accomplishing other particular benefits for the environment or society

A flexible purpose corporation must identify in its statement what it is to engage in as its specific purpose. These purposes can be chosen from the list included in the California

Corporation Code section 2602(b)(2), including promoting short or long-term positive effects or minimizing adverse effects for:

-a corporation’s workers, vendors, clients, and creditors

-the society and community

-the environment

The California Corporations Code sections 2500-3503 provide further guidance overall. Filing fees are still the same as general stock corporations. Articles of Incorporation are more free-form for these subtypes rather than using the California Secretary of State’s simple form, and thus the need for legal assistance.

It is also important to get legal counsel when these types of business subtypes occur during merger, acquisition, and selling transactions. A seasoned business attorney can provide reliable formation services and comprehensive business advice to get your business started and running efficiently.

Anthony Spotora is a Los Angeles business lawyer, Los Angeles entity formation attorney, and Los Angeles business incorporation attorney. To learn more, visit Spotoralaw.com.

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