Typically, a company’s actions are guided by the need to increase profits for its shareholders. That outlook will certainly contribute to financial success and longevity, but it can significantly limit the scope of a company’s social impact. As a California socially conscious entrepreneur whose business model factors in more than just profits, there are three main legal entities to consider.

These entities are the California Benefit Corporation, the California Social Benefit Corporation, and the Delaware Public Benefit Corporation.

General Overview of Each Entity Type

Created in 2011, the California Benefit Corporation was designed to allow socially conscious entrepreneurs to pursue both for-profit and non-profit objectives while running their business.

Similarly, the Social Purpose Corporation (renamed January 2015, previously known as a “Flexible Purpose Corporation”) also permits entrepreneurs to consider factors other than profits. However it does not have the same teeth when it comes to reporting requirements or enforcement proceedings.

Like California, the Delaware Public Benefit Corporation (PBC) is a new legal entity (approved by the DE legislature in 2013) designed to incorporate a socially conscious purpose and mission into the fabric of the business. Like the California Social Purpose Corporation, a PBC does not require a third party assessment, but it does permit a lawsuit for monetary damages based on a directors breach of their fiduciary duties. Similar lawsuits resulting from a breach of duties are also permitted in California Benefit and California Social Purpose Corporations, but they do not allow for monetary damages.

With that as an introduction, let’s have a look at some of the key distinctions between the three choices.

Purpose, Evaluation, and Reporting

In California, a benefit corporation must provide a “general public benefit,” but is not required to list any specific benefits in its articles of incorporation. California Corporations Code defines this general public benefit as a material positive impact on society and the environment taken as a whole.

While this may seem a broad definition that leaves much undefined, it is important to bear in mind that California has strict requirements regarding the evaluation of that public benefit. A third party must assess the corporation’s overall social and environmental performance annually, and that assessment must be reported to shareholders alongside other yearly reporting. Additionally, that assessment must be published in its entirety on the company’s website minus any sensitive financial or proprietary information.

A social purpose corporation must enumerate its specific public benefit in its articles, but no other evaluation is required. It is solely up to management to make evaluations regarding performance. An annual report including discussions by management regarding its social purpose performance, as well as financial statements, must be published on the corporation’s website. However, any corporation with fewer than 100 shareholders is not required to prepare and furnish the reports if the social purpose corporation holds unrevoked waivers of such compliance executed by shareholders holding two-thirds of the outstanding shares.

In Delaware, a benefit corporation must provide both general and specific benefits in its articles of incorporation. Unlike a California Benefit Corporation, but similar to a California Social Purpose Corporation, a third party evaluation is not required and the board can make its own assessment of the public benefit. The company is however required to make a biennial report to its shareholders regarding overall benefit performance, but does not have to publish anything on its website.

As the only structure which requires a third party assessment, the California Benefit Corporation yields the strongest sword against a claim that the mission is mere marketing ploy and not fully engrained within the business model.

Directors Duties

In California, both benefit and social purpose corporations require the directors to operate in good faith and in a way that they feel is in the best interest of the corporation, its shareholders, and its purpose. Directors must consider the impacts of any action upon not only the shareholders, but also upon the community, environment, customers and the ability to accomplish its public benefit purpose.

A Delaware benefit corporation requires that the board balance their specific public benefit with both the interests of the shareholders and the interests of those affected by the company’s actions. Directors satisfy this duty if their decisions are “both informed and disinterested.”

Enforcement

California law permits the corporation itself, or a derivative suit, to bring a benefit enforcement proceeding against an officer or director for violating his or her duties regarding the corporation’s public benefit. These proceedings allow for injunctive relief, but not for monetary damages. The California Social Purpose is not given a similar statutory provision, so the corporation and its shareholders are left with no internal corporate recourse.

For a PBC, shareholders who own at least 2% of the issued shares have a right to bring a derivative suit against the directors to enforce their duties. However, no action can be brought to enforce a PBC statutory provision except for those holding 2% of the issued stock. Additionally, in contrast to many other states, including California, the Delaware statutory law does not preclude monetary damages for breaching a director’s PBC duties.

Taxes

No matter which jurisdiction, or entity type selected, the corporation may elect to be taxed as C Corporation or an S-Corporation.

Which Entity is the Right Fit for You?

As a socially conscious entrepreneur, it is important to realize that one size does not fit all. Traditionally, some structures will be a better fit than others.

The Social Purpose and Delaware Public Benefit Corporation can save time and resources because a third party assessment is not required. Additionally, both models may help an entrepreneur cast a wider net when seeking investment due to the entities natural flexibility and less rigid standards. However, by allowing monetary damages for a breach of fiduciary duties, a PBC may make it more difficult to attract talented individuals to serve on your board. A good way to mitigate this possibility would be to consider ways to protect directors when forming a PBC.

Of the three options, the California Benefit Corporation seeks to engrain the social mission with the business. The stronger reporting requirements and enforcement proceedings help to dismiss an argument that this is simply a marketing ploy to favor goodwill with a customer base. However, this comes with an added cost that should not be dismissed when forming a company.

As the article has demonstrated, when selecting a socially conscious entity to fit your mission, it’s important to consider strategic and long-term objectives before forming your company. If you have any questions, please give us a call at (415) 633-6841 or send us an e-mail at info@bendlawoffice.com.

Disclaimer: This article discusses general legal issues and developments. Such materials are for informational purposes only and may not reflect the most current law in your jurisdiction. These informational materials are not intended, and should not be taken, as legal advice on any particular set of facts or circumstances. No reader should act or refrain from acting on the basis of any information presented herein without seeking the advice of counsel in the relevant jurisdiction.  Bend Law Group, PC expressly disclaims all liability in respect of any actions taken or not taken based on any contents of this article.

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