Meet the New “Hybrid” Corporations!

Dear Mary, I heard that there are some new kinds of “low-profit” business entities that are kind of like nonprofits and kind of like for-profit corporations. What are they? What’s the benefit of using them?

As of Jan. 1, there are two new forms of business entities in California: the Flexible Purpose Corporation and the Benefit Corporation. They are “hybrids” of traditional nonprofits and traditional for-profit corporations. Some are calling them “socially conscious” stock corporations because they allow for the organization of stock corporations that can pursue both economic and social objectives.

Although they are new in California, benefit corporations have been around in other states for some time. Before they came along, many people tried to create their own hybrids, which created risk and potential liability with shareholders (with for-profits) or with the IRS (with nonprofits).

Corporate directors typically have a fiduciary duty to focus on maximizing shareholder returns and profit, but with benefit corporations they may also consider social welfare goals.

The key to these new corporate forms is that the company’s Articles of Incorporation must specify a “special purpose,” in addition to the general authorization to engage in any lawful business under California corporation law. This allows directors and officers to promote the special purpose as expressly specified by the articles, even if it’s not economically valuable, provided that there is sufficient accountability and transparency.

The “special purpose” may be one or more charitable or public purpose activities that could be carried out by a nonprofit public benefit corporation. The point of requiring a special purpose in the articles is to put shareholders on notice that the corporation will be pursuing an interest that may or may not affect the profit of the company.

The special purpose also gives directors some flexibility in their decisions and actions. Directors’ conclusions must still be reasonable, but now they can favor a special purpose over the shareholders’ economic interests, without worrying about claims of breaching their fiduciary duties.

These entities are also subject to all of the provisions of California’s general corporation law, except as provided in the new law.

You might ask whether the Flexible Purpose Corporation entity is any better than a limited liability company. Actually, LLCs are extremely flexible and may include all of the requirements I’ve already discussed in the LLC operating agreement. Some people will argue that institutional investors typically prefer corporations over LLCs because corporations are all subject to the same statutory requirements and case law and are “cookie cutter,” whereas LLCs, because they are so flexible, vary considerably and it costs an investor time and money to do due diligence on a company-by-company basis. And then of course, there are tax implications for investors to consider.

I believe that the new hybrid corporation options are an improvement in California corporation law for those businesses that want to be philanthropic or socially conscious, as well as make money.

If you’re thinking about alternatives to traditional corporations and LLCs, consider the interests of the company and its shareholders, the employees, suppliers, customers and creditors, as well as community and societal considerations and the environment. Speak with your attorney and your CPA before making a decision.

Mary Luros is a business law attorney with Hudson & Luros, LLP, in Napa, and can be reached at mary@hudsonluros.com or 418-5118. The information provided here is not intended as legal advice, nor does it form an attorney-client relationship with the author. The author makes no representations as to the reliability or accuracy of the above information. In a perfect world we wouldn’t need disclaimers — or attorneys.