Key Issues for California Benefit Corporations

California has a few different types of corporate forms which social enterprises may wish to consider. The latest legislation, passed in 2012, allows for a company to incorporate as a benefit corporation.

Main Requirements for a California Benefit Corporation

The three key requirements for a California Benefit Corporation are: (1) a beneficial purpose; (2) consideration of broad stakeholder interests; and (3) regular reporting.

In order to qualify as a California benefit corporation, the company must provide a general public benefit. Additionally, it may also set out in its Articles of Incorporation a specific public benefit or interest which it wishes to address, such as poverty alleviation or racial justice.

The key advantage of incorporating as a benefit corporation vs a regular corporation is that a benefit corporation’s directors are insulated from liability if they decide to take into account wider public benefits, rather than merely stockholder value maximization, when making business decisions. Although scholars have noted that there may be other ways of insulating directors from liability when making these types of decisions, incorporating as a benefit corporation makes this point explicit and clear.

In fact, the directors of a California benefit corporation must consider the impacts of a proposed action on a wide array of stakeholders, including shareholders, employees, subsidiaries, suppliers, customers and society at large.

The third key requirement is that a benefit corporation must issue regular reports on the status of its efforts to address its chosen issue areas. This must include an “assessment of the overall social and environmental performance of the benefit corporation, prepared in accordance with a third-party standard”.

This level of transparency helps provide assurance to customers, shareholders and other stakeholders that the benefit corporation is staying true to its stated goals of providing a social benefit while undertaking its other business activities.

Is Being a Benefit Corporation Necessary to have a Mission-Driven Company

It is not necessary to be a benefit corporation if you want to have a social enterprise or mission-driven company. Entrepreneurs often find that starting a company as a sole proprietorship or an LLC is sufficient in order to establish a business model and gain traction during the initial stages. It might be something to think about at a later stage, but you can certainly focus on multiple stakeholder interests or address societal issues while operating as another entity.

The main advantages are the liability protection for directors - which might not necessarily be relevant for an early-stage company.

It may also be helpful in signaling your commitment to your mission - but it is not a necessity, especially at an early stage.

So an entrepreneur beginning a new project should not feel that this is an absolute requirement simply because they wish to give back while building a successful business.

When Should You Form a Benefit Corporation

As discussed above, you do not need to incorporate as a benefit corporation at the beginning of your new business even if you would like the business to act like a social enterprise.

Once you have gained traction and are considering taking on substantial outside investment, this may be an opportune time to consider incorporating your company. And if your intention is to focus on providing a public benefit, then it may be wise to protect yourself (and any other directors) by taking advantage of California’s benefit corporation legislation.

And even if you didn’t originally incorporate as a benefit corporation, a California company may amend its articles and become a benefit corporation by following the procedures outlined in California Corporations Code § 14603.

Disclaimer: The information in this article is provided for informational purposes only. You should consult with an attorney before you rely on this information. This information should not be seen as legal advice and does not create an attorney-client relationship. This article is meant to be a general discussion and may not include all relevant information regarding the issues covered.