Understanding and Forming a California Benefit Corporation

As of January 1, 2012, California corporate statutes have permitted the formation of “benefit corporations,” a subtype of stock corporation with the purpose to create a “general public benefit.” Benefit corporations are subject to the California Corporations Code sections 14600 through 14631 as well as California’s General Corporation Law, to the extent not in conflict or inconsistent with the provisions specific to benefit corporations. (See the announcement by the California Secretary of State here.)

What are the basic attributes of a benefit corporation?

  • General public benefit:  A benefit corporation must have the purpose of creating a “general public benefit,” defined as a material positive impact on society and the environment, taken as a whole, as assessed against a third-party standard.

  • Annual benefit report: Whether a benefit corporation is actually serving a general public benefit must be assessed every year through the drafting and issuance of an annual public benefit report to shareholders. The report does not need to be certified or audited by a third party – the corporate directors or staff can compile it – but it does need to include an assessment of the overall social and environmental performance of the corporation, prepared in accordance with a “third-party standard.”  The report generally must be posted on the corporation’s website. More information about choosing a third party standard is here.

  • Corporate decision making:  Directors of a benefit corporation must consider the impact of any action or proposed action on corporate stakeholders including employees, customers, the local and global environment and shareholders as well as community and societal considerations and the ability of the benefit corporation to achieve its purposes.

  • Enforcement: The benefit corporation and its directors and officers may be held accountable for failure to pursue a general public benefit, to issue the annual benefit report and to consider the impact of corporate actions on stakeholders through a “benefit enforcement proceeding.” Although this proceeding does not permit the recovery of monetary damages – only injunctive relief – the court may award attorney fees and other reasonable expenses incurred by the plaintiff in bringing suit.

  • Supermajority voting requirements: Certain corporate decisions affecting the company’s status as a benefit corporation require a vote of at least two-thirds of each class or series of shares in the corporation. For example, decisions to directly or indirectly terminate benefit corporation status or to dispose of substantially all of the assets of the corporation require this supermajority vote.

How do I form a new California benefit corporation?

Forming a California benefit corporation is very similar to forming a regular stock corporation but with additional restrictions inserted into the language of the Articles of Incorporation, the corporate bylaws and the corporate stock certificates. The following is a checklist of legal steps to forming a benefit corporation:

  • Draft a business plan, settle on a corporate name and identify initial shareholders and directors.

  • Check the availability of the corporate name and, if desired, reserve the name with the California Secretary of State.

  • Prepare the corporate bylaws, including appropriate provision from the California corporations code regarding the annual benefit report, corporate decision-making, minimum status vote requirements and share certificates specific to benefit corporations.

  • Determine whether any licenses, permits and/or insurance must be procured.

  • Prepare the Articles of Incorporation (including restrictive benefit corporation language) and file with the California Secretary of State.

  • Once the Articles are filed, hold the first meeting of the Board of Directors to adopt bylaws, appoint officers and discuss initial business activities. At this meeting the directors may also discuss what third-party standard to use in preparation of the annual benefit report. Guidance on that choice is here.

  • Obtain an employer identification number from the Internal Revenue Service.

  • Open a bank account.

  • Issue shares, including in the stock certificates the required restrictive benefit corporation language.

  • File any appropriate securities exemption notices at the federal and state level.

  • Obtain any necessary licenses, permits and/or insurance.

  • Within 90 days of filing the Articles, file a Statement of Information with the Secretary of State.

How do I convert my existing business to a California benefit corporation?

If your current business is a California corporation, the conversion process requires amending the Articles to contain a statement that the corporation is a benefit corporation. Bylaws should also be amended to ensure that corporate structure and governance are in conformity with the requirements of the benefit corporation statute. Finally, share certificates must be amended to include the required benefit corporation language.

If your current business is not a California corporation, the conversion process will be specific to the existing entity, but will generally require a minimum status vote by at least two-thirds of outstanding holders of interests that are entitled to receive a distribution of any kind from the business entity.

Additional Resources

 

Written by: Cameron Holland