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Flexible Purpose Corporations

Hollywood movies love to play out the battle between good and evil by pitting the Passionate Do-Gooder against the Evil Corporation. The Do-Gooder cares about justice, nature and people, while the Corporation only cares about one thing: money.

California just might change all that.

In 2011, the California legislature enacted the Corporate Flexibility Act, which went into effect January 2012. Among other things, the act created a new kind of business organization: the flexible purpose corporation (FPC). Unlike traditional not-for-profit organizations, FPCs are operated for profit — but not only for profit. As part of their process of incorporation, FPCs declare a qualifying special purpose focused on doing some kind of good. Under the law, qualifying purposes include:

  • Performing charitable or public benefit activities typically carried out by nonprofit companies
  • Having a positive effect (or minimizing any negative effect) on employees, customers and others associated with the business
  • Benefiting the community and society
  • Pursuing positive environmental outcomes

Why does it take a law to give corporations a conscience? After all, companies have been carrying on charitable activities for a long time. The reason is that, historically, leaders of public corporations have had a legal duty to always make shareholder value their top priority. The Corporate Flexibility Act allows management to weigh its stated priorities — financial and otherwise — when making decisions, and protects the company against legal action taken by shareholders when the goals of the special purpose are allowed to take precedence.

For instance, while some may feel the special purpose of simply minimizing adverse effects on employees or customers is a less-than-lofty goal, the possibility of legitimately placing employee needs above immediate profitability is, in fact, ground-breaking. The Corporate Flexibility Act sets forth very specific requirements that must be included in the Articles of Incorporation of a qualifying FPC. Consult a qualified California business formation attorney if you are interested in bringing a sense of purpose to your new or existing business.

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