Benefit Corporations and Flexible Purpose Corporations

What is the Difference Between Benefit Corporations and Social Purpose Corporations?

Benefit Corporations and Social Purpose Corporations are entity types that were established in California with an eye towards allowing for-profit companies to engage in socially-minded activities traditionally carried out by non-profit organizations. Such activities are typically frowned upon by traditional corporation shareholders and the law.

It should be noted that neither Benefit Corporations nor Social Purpose Corporations get special tax treatment in a way that non-profit organizations do.  But both corporate types are structured as for-profit entities that can be used by for-profit entrepreneurs who consider themselves for-impact as well—that is, they want to have a social and environmental impact.  But there are significant differences between the two that should be considered by entrepreneurs looking to stay in the for-profit realm while using their business to make a difference in the community and the environment.This article focuses on the differences between California Benefit Corporations and Social Purpose Corporations (which only exist in California). For a discussion of the difference between California Benefit Corporations and Delaware Benefit Corporations, see this article.

Benefit Corporation (the Legal Structure) and B Corp (the Certification from B Lab)

This is often a source of confusion for entrepreneurs, but the Benefit Corporation form should be distinguished from the B Corp certification, which is a social and environment impact certification from B Lab, and not its own legal corporate mechanism.

What are the Differences Between Benefit Corporations and Social Purpose Corporations?

Both the Benefit Corporation and the should be used by those who are truly dedicated to causes beyond profits (or those who seek financing from investors who are dedicated to social and environmental stewardship). But there are some differences between the entity types, as described below.

Benefit Corporation. A Benefit Corporation is required to be formed for the purpose of creating general public benefit. This means that a Benefit Corporation must operate as a triple-bottom line business by considering its impact on the community and the environment, taken as a whole, along with generating profits for its shareholders. A Benefit Corporation is not allowed to give priority to any of the following factors when making decisions, unless it has stated otherwise in its Articles of Incorporation.

Directors of a Benefit Corporation must take into account the shareholders, employees, and customers of the corporation, the community and society, the local and global environment, the short-term and long-term interests of the corporation, and the ability of the corporation to accomplish its public benefit purposes.

Social Purpose Corporation. A Social Purpose Corporation is also required to consider factors other than profit in its decision making. However, unlike the Benefit Corporation, the there is more flexibility for the directors in assigning different weights to each of the different factors as they deem appropriate.

Directors of a Social Purpose Corporation are required to factor into their decision making the overall prospects of the corporation, the best interests of the corporation and its shareholders, and the purposes of the corporation listed in its Articles of Incorporation.

Here is a summary of some of the key differences between Benefit Corporations and Social Purpose Corporations in California:

  Traditional Corporation Benefit Corporation Social Purpose Corporation
Corporate Purpose Maximizing income for shareholders. Serving a general public benefit, defined as having a “material positive impact on society and the environment, taken as a whole.” And corporation may identify and add additional specific public benefits. Serving one or more of the following specific purposes:

  • Charitable activities that a non-profit can carry out;
  • Benefitting the corporation’s employees, suppliers, customers, and creditors;
  • Benefitting the community and society; or
  • Benefitting the environment.
What Factors is the Corporation Required to Consider? Corporation may generally only consider the profits of its shareholders. Corporation must create general public benefit by considering social and environmental factors in its decisions. Corporation must consider the interests of the corporation, its shareholders, and any specific purposes laid out in its Articles of Incorporation.
Is a Third-Party Evaluation Required? N/A Yes. The overall performance of the corporation’s societal and environment impact must be assessed in accordance with a third-party standard. No. The evaluation of the corporation’s impact on its special purpose is based on the management’s discussion and analysis. This analysis must identify the organization’s special objective, discuss actions taken, and reveal expenses incurred.
Is Reporting on Social and Environmental Impact Required? N/A Stringent annual “benefit report” discussing general public benefit of corporation based on independent third party assessment is required. Report must be given to shareholders annually and posted on public website. Less stringent annual report discussing special purpose of corporation based on management’s discussion and analysis required. Report must be given to shareholders annually and posted on public website.
What is the Mechanisms to Enforce Corporate Purpose? N/A “Benefit proceedings” to ensure furtherance of general public benefit. Traditional enforcement proceedings, such as derivate lawsuit by shareholders.

More on the Enforcement Mechanisms

Both Benefit and Social Purpose Corporations may be under close scrutiny by shareholders based on ongoing reporting requirements.

But Benefit Corporations may be sued by shareholders, directors, the corporation itself, or owners of a parent corporation in a “benefit proceeding” to determine whether the corporation is adequately pursuing its benefit purpose.

Shareholders in Social Purpose Corporations have no analogous proceeding to the “benefit proceeding” but have traditional enforcement mechanisms available in the standard for-profit corporation context. These may include derivate lawsuits by the shareholders of a corporation against its directors.

Other States

Benefit Corporation statutes have been passed in 27 states across the country, and they have been introduced in 13 other states and territories. For example, Delaware signed into law its Benefit Corporation act in July 2013. Please note that the specific details of each state’s requirements may differ. For more information, click here.

In contrast, Social Purpose Corporations only exist in California.

So Why Not Just Use a Regular Corporation for my Social Enterprise?

Traditional corporations may be at risk if they engage in philanthropic behavior that takes away from the corporation’s profits. Under the traditional corporate form, actions by the corporation that are not done in furtherance of maximizing profits and income for shareholders can be considered a breach of the fiduciary duty to shareholders. For example, in 1919 when Henry Ford wanted to use money from the Ford Corporation to reduce the cost of cars for customers, shareholders sued him and the court found a breach of fiduciary duty to shareholders.

Drop us a line if you want to learn more about what type of entity is best suited to achieve your goals.


DISCLAIMER: The information in this article is provided for informational purposes only and should not be construed or relied upon as legal advice. This article may constitute attorney advertising under applicable state laws.

Ryan Shaening Pokrasso

Ryan is an attorney who believes that business can be a powerful tool for social change. Ryan's practice focuses on assisting entrepreneurs with entity formation, startup financing, securities regulation, employment issues, business transactions, intellectual property, non-profit organizations, data privacy, and governance.

More Posts

Follow Me:
TwitterLinkedIn