California Public Benefit Corporations; What They Do, And How They Are Created

California recently enacted Assembly Bill 361, which allows formation of “Benefit Corporations.” Maryland was the first state to enact such a law, California is the sixth. The law allows formation of corporations that have goals other then maximizing profits. In the traditional form, corporation directors have a fiduciary duty to shareholders to maximize profits and promote the long-term value growth for shareholders. As experienced Sacramento Business Lawyers advise their clients, the business judgment rule rises as a presumption that the directors exercised good faith in pursuing the corporation’s interest; however it does not arise is there is no reasonable connection between the goal and their actions. In the benefit corporation however, the directors have a legal duty to take into account the public interest.

A benefit corporation must l have the purpose of “creating general public benefit” stated in its Articles. 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. -There’s the rub- the third party standard. There are a number of organizations who have established standards, and you can be qualified by them for an annual fee. The benefit corporation may also identify in its Articles one or more specific benefits that shall be the purpose or purposes of the benefit corporation.

Specific benefits can be:

(1) Providing low-income or underserved individuals or communities
with beneficial products or services.
(2) Promoting economic opportunity for individuals or communities
beyond the creation of jobs in the ordinary course of business.
(3) Preserving the environment.
(4) Improving human health.
(5) Promoting the arts, sciences, or advancement of knowledge.
(6) Increasing the flow of capital to entities with a public
benefit purpose.
(7) The accomplishment of any other particular benefit for society
or the environment.

The designated general and specific public benefit are deemed to be in the best interests of the benefit corporation.

Unlike a nonprofit corporation, a benefit corporation has no limits on the ways it can raise money. The invested money can create returns that further finance the public benefit mission. Several well known California corporation, including Patagonia and Give Something Back (as reported in the Sacramento Business Journal), have already made the switch to become benefit corporations.

However, another form of corporation was authorized this year- the ‘Flexible Purpose Corporation.” What this entails, and how they compare, will be the subject of my next post.