Hundreds of years ago, corporations and other business entities that enjoyed the benefit of limited liability were required to exist for an adequate public purpose. They were required to serve some overall social goal that was deemed worthy and valuable. In exchange for that social value, governments granted corporations the benefit of limited liability, because they recognized that the resulting calculated risk taking would impart value to society as a whole. In short, limited liability was deemed a fair trade for public benefits that would otherwise not have been provided directly by the government.
The Profit Motive
As time marched on, the requirement that corporations and other business entities (such as limited partnerships) provide social value diminished, and business entities morphed solely into machines of profitability. In other words, the directors and officers of companies owed their main fiduciary responsibilities to shareholders and to profitably conducting business, rather than to the public or to the idea of creating social value.
Blast From The Past
California is a pulling a chapter from a very old playbook. As of January 1, 2012, two new types of stock corporations are recognized under California law. The first is called a Flexible Purpose Corporation (“FPC”). The purpose of an FPC goes beyond earning a profit for shareholders. In fact, the incorporators of an FPC have the option to make the company benefit shareholders in addition to stakeholders (e.g. employees, clients, suppliers, and/or creditors), the community or society, and/or the environment.
The second type of entity is called a Benefit Corporation. A Benefit Corporation may have the general purposes permitted under the California Corporations Code, but it must also have the “purpose of creating general public benefit.” In fact, if a Benefit Corporation serves only a public purpose, contributions to it can be tax deductible.
The broad reading of the creation of these two new types of entities in California is that directors and officers of these types of corporations are unlikely to be held liable for a breach of fiduciary duty if their decisions and actions have the effect of limiting profit but, at the same time, serve some greater public purpose.
If You’re Interested (And You Should Be!)
If you’re interested to learn more about these types of quasi-public purpose business entities, you have two choices. First, you can read the California Corporations Code (section 2602 for FPCs and section 14600 for Benefit Corporations). Second, and the much more enjoyable option, would be to contact our office to schedule an appointment. We’d be happy to sit down and have a conversation about how newly available business entities (yes, even in states other than California) can help you achieve your overall goals, regardless of whether those goals are profit, social change, or some combination of the two.
The Parents Estate Planning Law Firm, PC
