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Public Benefit Corporations

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Message Board Public Benefit Corporations

This topic contains 2 replies, has 2 voices, and was last updated by Jim Hundshamer 3 months, 2 weeks ago.

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  • #173858
    Jim Hundshamer

    Looking for any information on how to form, what filing requirements are there and how does IRS conform to this corporation. Hundshamer CPA

  • #174367
    Lynn Freer

    You register with the SOS, where you find information about filing. CA first allowed them in 2011. They are generally non profit but not charitable organizations. Here is an article we wrote in 2015.

    Kinder, gentler corporations bridge for-profit and not-for-profit
    Two new corporate structures allow corporations to be socially responsible as well as profitable.
    Thursday, January 01, 2015

    By: Sandy Weiner, J.D.

    Legislation enacted in 2011 authorized the formation of two new types of corporations effective January 1, 2012: a public benefits corporation (B-corp)1 and a flexible purpose corporation (FPC).2 SB 1301 (Ch. 14-694) renamed “flexible purpose corporations” to “social purpose corporations” (SPC) and made other modifications to the Corporate Flexibility Act of 2011, as discussed below.

    These new forms of entities allow corporations to go beyond the “bottom-line” in creating economic value for their shareholders by allowing the corporate directors to also consider social and environmental goals in fulfilling the corporate objectives. Both corporate structures provide a type of “middle-ground” between for-profit and not-for-profit corporations.

    Example: An often-cited example of the conflict corporate directors face when trying to be socially responsible is the buyout of Ben & Jerry’s by Unilever.3 As a public corporation, Ben & Jerry’s Board felt compelled to accept Unilever’s buyout bid even though they felt that Unilever would undermine the company’s long-term commitment to social responsibility. Their fear was that if they refused the bid, they would face a lawsuit by shareholders for not fulfilling their fiduciary duty to the shareholders.
    Tax returns
    While these entities provide a social or charitable commitment, they are not nonprofits. The tax reporting and payment requirements remain the same whether the corporation is a general corporation, a B-corp, or an FPC/SPC.

    A C corporation will file on Form 100 and an S corporation will file a Form 100S. Each is subject to tax at the corporate rates and are subject to the $800 minimum tax.

    While both the structures offer the middle legal ground between being a for-profit corporation and a not-for-profit corporation, there are differences. Here is a discussion of these differences.

    Qualifying special purpose
    The articles of incorporation for each entity must identify the corporation as a B-corp or SPC (FPC prior to January 1, 2015). The articles for the B-corp must additionally state a general public purpose benefit, defined as “a material positive impact on society and the environment, taken as a whole,”4 and may identify any specific public benefit adopted by the Board, such as, but not limited to, providing beneficial products or services to low-income communities, preserving the environment, improving human health, or promoting the arts.5

    An SPC must also contain a statement in its articles that the purpose of the corporation, in addition to and together with the shareholder’s financial interest and corporate legal obligations, is to engage in one of the following:

    One or more charitable or public purpose activities that a nonprofit public benefit corporation is authorized to carry out;
    Promote positive short-term or long-term effects, or minimize adverse short-term or long-term effects of the corporation’s activities upon any of the following:
    Corporation’s employees, suppliers, customers, and creditors;
    The community and society; or
    The environment.6
    One important distinction is that the B-corp statute also requires that the general public benefit standard conduct an annual self-assessment utilizing standards developed by an independent third party as specified in Corp. Code §14600(g), whereas no third-party assessment standard is required for SPCs. The B-corp’s independent assessment standards might be more attractive to investors who want to ensure the corporation is indeed conferring a “public benefit” rather than a public relations campaign.

    Unlike general corporations, directors of both B-corps and SPCs are not limited to evaluating the impact of their decisions on the shareholders when determining what is in the best interests of the corporation, but must consider other interests as well.

    B-corp directors must consider the impact of the following corporate activities on:

    Corporate shareholders;
    Corporate employees and workforce, subsidiaries, and suppliers;
    Customers (as beneficiaries of general or specific public benefit purposes);
    Community and societal considerations (including the community where facilities or offices are located);
    Local and global environment;
    Short-term and long-term interests of the B-corp; and
    The ability of the B-corp to accomplish its general and specific purpose.7
    Unless specified in the corporate articles, no one factor is given priority.

    In contrast, SPC directors may not be held liable if they act in the best interests of the corporation, which may include taking into consideration the corporation’s short-term and long-term prospects as well as the purposes of the corporation.8

    Unlike the mandate of B-corp directors to consider the impact of the corporate actions on the specified stakeholders and specific public benefits, under the original Corporate Flexibility Act, FPC directors were given the discretion to consider the impacts on these groups/issues. However, SB 1301 has now made this consideration mandatory for SPC directors, effective January 1, 2015, and authorizes SPC shareholders to bring derivative suits to enforce this mandate.9

    Reporting responsibilities

    Both the B-corp and SPC are required to provide annual reports to their shareholders assessing the company’s performance and must make these reports available to the public.10 As discussed above, however, only the B-corp is required to use an independent, third-party standard to accomplish this.

    Although SPCs are not required to use third-party standards, they must include in their annual report a management and discussion analysis section that evaluates whether the SPC achieved its special purpose and must ensure that this discussion is complete and accurate. Additionally, the SPC must issue a special purpose current report to its shareholders within 45 days of:

    The incurrence of an expense likely to have a material adverse effect on the company’s operations;
    Any withholding of any planned expense that is likely to have a material adverse effect on the company; or
    A determination that the special purposes of the corporation have been satisfied or should no longer be pursued.11
    Prior to January 1, 2015, the requirement to issue the supplemental report could be waived if the FPC had fewer than 100 shareholders and two-thirds of the shareholders voted to waive the requirement. SB 1301 repealed this waiver provision.

    Current use
    To date, California is the only state to authorize FPCs/SPCs, whereas 15 states now authorize B-corps.

    The last report issued by the California Secretary of State’s (SOS) Office on B-corps found that in the first 17 months since the authorizing legislation took effect, 142 B-corp documents were submitted to the SOS’s office, and 103 B-corps were actually created.

    As of March 24, 2014, the SOS reported that 210 corporations were formed since January 1, 2012, with 62 considered FPCs. Of the 62 FPCs, 34 existing corporations changed their status to an FPC; therefore, only 28 entirely new corporations were created as FPCs.12

    Note: A two-thirds vote of all shareholders is required to convert existing corporations to B-corps or FPCs/SPCs. A two-thirds vote is also required to convert an FPC to an SPC.

    1 AB 361 (Ch 11-728); Corp. Code §14600 et seq.
    2 SB 201 (Ch. 11-740); Corp. Code §2500 et seq.
    3 “California Creates Two New Types of Corporations, Understanding the Benefit Corporation and Flexible Purpose Corporation,” by Rob R. Carlson and Lisa M. Tran in Stay Current, March 2012
    4 Corp. Code §14601(b)(3)
    5 Corp. Code §14620(b)
    6 Corp. Code §2602
    7 Corp. Code §14620(b)
    8 Corp. Code §2700
    9 Corp. Code §2900
    10 Corp. Code §§3500, 14621
    11 Corp. Code §3501
    12 Legislative Analysis of SB 1301 (Ch. 14-694)

  • #174419
    Jim Hundshamer

    Thank you very much. This was very helpful.