Differences Between Flexible Purpose and Benefit Corporations

Back on New Year’s Eve in 2012, Corporation Code Section 2500 et seq. and Section 14600 et seq. created two different business identities, which came to be known as Benefit Corporation and flexible purpose corporation. Both these corporations are allowed to have an organizational structure that encompasses economic benefits and profits along with social welfare and objectives. In simple words, both these corporations are hybrids of conventional corporations that are for profits and conventional nonprofit corporations. To put it in another way, they both are socially aware stock corporations.

What’s the Difference?

Okay, so you’re wondering now about what really are the differences between benefit corporations and flexible purpose corporations, as on paper they seem to be pretty much the same. To begin with, a flexible purpose corporation can practice social welfare without any liability to directors for maximizing profits. For this reason, at least one special purpose has to be identified in the Articles of Incorporation. On the other hand, benefit corporations are required to practice social welfare and have more requirements than conventional stock corporations.

Benefit corporations allow corporate directors to consider and pursue social welfare objectives along with the profit making motive. Thus, they are not liable for pursuing these goals that may not maximize shareholder returns. While both these entities are still relatively new in California, they have been prevalent in other states. Hence, they may not work out for all incorporation, and neither of these types allows exemptions on taxes. With that being said, a company can form or convert into a Flexible Purpose Corporation or Benefit Corporation for profit under the California Corporation Code Sections 2600 and 14600 et seq. respectively. This allows the entrepreneur with recognition of being social conscience along with the benefit of being for profit.

Why Two?

Benefit Corporations are generally more restrictive and require intensive documentation as opposed to Flexible Purpose Corporations. In other words, flexible purpose corporations have flexible reporting requirements and qualifications. Hence, in this context, flexible purpose corporations differ from benefit corporations in three ways:

1) For Benefit Corporations, it is a requirement to practice General Public Benefit, which is defined by the California Corporation Code as ‘material positive impact on society and the environment, taken as a whole’. On the other hand, flexible purpose corporations only have to practice an indentified purpose with positive effects on one of the following: its customers, employees, creditors, suppliers, community and the society or environment.

2) For Benefit Corporations, it is a requirement to determine the success based on autonomous third party standards. This can be costly, not to mention time consuming. As for Flexible Purpose Corporations, such standards do not exist.

3) For Benefit Corporations, it is a requirement to provide an assessment of the activities that support the purpose of the incorporation, which are determined against third party standards. On the other hand, Flexible Purpose Corporations can waive off shareholder report requirements given the circumstances. And when the annual reports are required, they not as onerous on the company resources.