The Good of Flexible Purpose Corporations

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.