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The Good of Flexible Purpose Corporations

3p Contributor | Monday November 12th, 2012 | 4 Comments

This article has been edited since it was first published.

By Deborah Sweeney

Back in January of this year, California officially began to recognize two new types of corporations, the Benefit Corporation and the Flexible Purpose Corporation, after Gov. Jerry Brown signed S.B 201 and A.B 361 into law last October. It has been a bit over a year now since the governor gave his signature of approval, and while Ben & Jerry’s recent decision to become certified as a B Corp [Ed note: Ben & Jerry's did not change their corporate structure to become a Benefit Corporation - see here for an explanation of the difference] has earned that structure a bit more press, there has not been as much analysis of the Flex-C designation.

Part of the reason for the lack of analysis, is that Flexible Purpose Corporations are, so far, only recognized in California, and there still is no official IRS recognition for the structure. But, as of last month, fifteen corporations have chosen to be Flex-Cs, and it is worth analyzing what the overall benefit of a Flex-C is when compared to a B Corp, especially as some begin to question whether or not Flex-Cs do produce a positive impact on society.

The Flex-C designation requires that corporations include some special purpose, which they consider to be beneficial to society, in their Articles of Incorporation and on their share certificates. That special purpose becomes their paramount priority, in most cases superseding the normal requirement that corporations maximize profits. In this, both structures are fairly similar; they both set out on a mission and help protect the business from being sued if that mission results in smaller profits.

Flex-Cs differ from B Corp in several ways – Flex C is a corporate structure and B Corp is a certification from B Lab – a third party who audits all the companies it certifies. [Ed note: see clarifying comment from B Lab below describing the third option, Benefit Corporation]. B Corps have to undergo annual audits, ensuring that they have a positive impact on the environment, the community, their employees, and on society. B Lab charges a fee for certification.

Many small businesses shy away from B Corp status for exactly that reason. A B Corp designation would ensure that they could raise capital through selling shares without having to lose control over whatever social mission they set, but it also means yearly audits and fees, if they choose to seek certification. Flex-Cs still have to send out annual reports that describe how the business is adhering to its mission, but there are no third parties involved.

While this sounds good to business owners who don’t feel like giving a chunk of their profits to an outside organization, it has led to some criticism. If there is no third-party adherence, what is to stop a Flex-C from simply using the designation to get good press and then shirking its mission to focus entirely on profits? Well, like with a regular corporation, the board of directors is still responsible to the shareholders. And if a mission for some public good is printed onto every share certificate that has been sold, a lot of shareholders expect that this mission will be adhered to.

Flex-Cs also have a lot more freedom to choose what, exactly, they consider to be a positive impact on society. A company called Prometheus Civic Technologies made ‘reducing the burden of government on people’ their special purpose. Creating a more limited form of government may not adhere to what everyone believes is a positive impact on society – there are likely plenty of people who believe the power of the state should grow, rather than shrink. But a Flex-C is not required to quantify their mission like B Corps are, and so the original vision of the business’s creator can still be adhered to, even if people debate whether or not that mission produces a positive impact on society.

Both forms come with their own positive and negative aspects, and undoubtedly some less-than-savory corporations will take advantage of the goodwill generated by including a B Corp or Flex-C designation after the business’s name. But both do seek to positively impact the community and society that they do business in. In my opinion, anything that will allow a business owner to keep his or her company’s original mission, while still allowing them to raise capital through traditional means, is a good thing. California will benefit from corporations that adhere more closely to their values than to how much money they are generating, regardless of what they disclose their ‘special purpose’ as being.

About the Author:

Deborah Sweeney is the CEO of MyCorporation, an online filing services company that specializes in incorporations and LLCs. Find her online at mycorporation.com and on Twitter @deborahsweeney and @mycorporation.

 


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  • Craig Everett

    My understanding of the benefit corporation legislation language is that the firm is required to adhere to an independent third party standard and publish an annual compliance report, but there is no requirement for a third party audit.
    Of course if you pick a proprietary third party standard, like the B-Corp standard by B Lab, then yes, audits and fees will be required. If you pick an open standard like ISO 26000, then you aren’t required to do third party certification. Rather, you simply publish your own report about how your firm complied with that standard.
    Craig Everett, PhD

    • Deborah Sweeney

      You are absolutely, one-hundred percent right on that, and I can’t believe I made such an egregious error. After reading article after article about adhering to a third-party standard, I somehow wound up thinking that the third-party standard was auditable. But yes, there are a few options when it comes to choosing a standard, and a benefit corporation does not require any audits.

      The full wording, at least for California’s law, is:

      ‘“General public benefit” means a material positive impact on society and the environment, taken as a whole, as assessed against a third-party standard, from the business and operations of a benefit corporation.’

      Making sure that your business meets this standard can be time-consuming, but you do NOT have to pay a third-party to audit what you release. But if you go the route of adhering to ISO 26000, you still have to pay to access the set of standards. And I think the fee is somewhere around two-hundred dollars – I could be mistaken about that, however.

      This is fairly new legislation, but there are rumblings that one of the most popular options to meeting these third-party standards is going to be to receive some sort of certification, just for simplicity’s sake. Of course that is not the only way, and simply receiving a certificate as a ‘green’ business won’t meet all the requirements that a benefit corporation must adhere to. Many will probably opt to adhere to some sort of framework in addition to, or instead of, seeking certification, and then just publish their own analysis based upon it – but finding, and adhering, to that third-party standard could cost money.

      Flex-C’s, on the other hand, are not required to adhere to that third-party standard. Whether or not that is a good thing is still debatable, but opting for a Flex-C over a benefit corporation might help save some money.

      • jenboynton

        It looks like a lot of the confusion here is from the difference between “B Corp” and “Benefit Corporation,” which comes up a lot around here. I’m going to make a few small changes to the article to clarify – thanks for bringing this to our attention everyone!

  • Holly

    Thank you for you article on the flexible purpose corporations. As a Policy Associate for B Lab, I would like to clarify a few points regarding your November 12th article.

    First, benefit corporations do not need to be certified or audited by a third party. However, they do need to assess their activities against third party standards, similar to how
    companies use the third party established GAAP accounting principals for their financial reporting. It is the company’s choice and not the government’s decision regarding which third party standard they will use. Some standards, such as B Lab’s B Impact Assessment, are free while some standards have associated costs. B Lab only charges a fee if a company decides that they would like to be certified, similar to how CPAs charge to audit one’s financial statements. Ben & Jerry’s, for example, is a Certified B Corporation, but is not a benefit corporation. Requiring benefit corporations to use to a third party standard creates clarity and accountability for the public as well as shareholders and potential investors. Flexible purpose corporation’s self-reporting requirements fail to provide this vital information. In fact, the flexible purpose legislation creates market confusion and encourages potential abuse be allowing one-off and non-comparable self-reporting.

    Second, benefit corporations are also held accountable to their expanded corporate purpose through a benefit enforcement proceeding that gives shareholders a right of action for a corporation’s failure to pursue its general public or any specific public benefit purpose. Flexible purpose corporations lack this additional right of action. Thus, directors and officers cannot be held accountable by shareholders to enforce the company’s special purpose.

    Third, benefit corporations are required to have a general public benefit purpose defined as creating a material positive impact on society and the environment. The decision regarding what is material positive impact on society and the environment is left up to the shareholders to enforce. In addition, benefit corporations may layer specific public benefit purposes on top of their general public benefit purpose by including them in their articles of incorporation. Thus, Prometheus Civic Technologies could become a benefit corporation with a general public benefit purpose and the additional specific public benefit purpose of “reducing the burden of government on people”.

    Fourth, the special purpose of flexible purpose corporations creates a quandary for shareholders, potential investors and consumers. A special purpose can be defined narrowly as well as be time limited. Thus, a corporation could commit to a special purpose of building a playground, then build the playground, but would then still be registered as a flexible purpose corporation in perpetuity. This creates market confusion for investors who want to invest in mission driven companies and shareholders who invested in the company the understanding that it was a new type of corporation as well as consumer confusion.

    Lastly, benefit corporation legislation is quickly proliferating across the country and we estimate that there are now over two hundred benefit corporations. Seventy-five of these benefit corporations are registered in California, greatly outnumbering the number of flexible purpose corporations.