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Flexible Purpose Corporations–Differences, Advantages, & Disadvantages

As of January 1, 2012, under California Corporations Code §§ 2500-3503, traditional business corporations may organize as “Flexible Purpose Corporations.” Whereas previously, corporate directors were bound to manage corporations strictly for economic gain, this new organizational model grants directors the freedom to manage the corporation for social and environmental benefits. This gives corporations the opportunity to organize and operate as socially-aware entities, while preserving their right to maintain a for-profit operation.

What Are the Advantages of Flexible Purpose Corporations?

To qualify as a flexible purpose corporation, a company must operate so as to have a positive effect on one of the following: the community, society, environment, its employers, customers, creditors, or suppliers. Flexible Purpose Corporations also maintain greater freedom because in certain circumstances the company can waive out of extensive annual reporting requirements. Supporters of flexible purpose corporations explain that serving as a shareholder for such a corporation is increasingly beneficial because such shareholders are able to embrace the rewards of serving a greater societal interest.

Furthermore, a flexible purpose corporation does not need to identify a general public or societal benefit. The corporation must only identify a general intent to pursue legal corporate activity, and a dedication to one or more special purposes. Such purposes may be narrowly defined to fit specific societal or environmental purposes. Ultimately, Flexible Purpose Corporations have greater flexibility in their aim to pursue non-profit purposes. Additionally, the name of the corporation must contain the words “flexible purpose corporation.” Finally, directors or officers of a flexible purpose corporation who perform their respective duties in line with their fiduciary duties to the company are protected from liability for their decisions. As such, corporate directors for flexible purpose corporations enjoy broader freedom from shareholder lawsuits because directors enjoy a broader range of freedom to exercise their decision making powers.

What Are the Disadvantages of Flexible Purpose Corporations?

The social and environmental focus of flexible purpose corporations may, however, pose a threat to the corporation’s overall purpose. In general, corporations may focus more on their social and environmental goals at the expense of their underlying operations. Additionally, in the event that the company is unable to waive out of the annual reporting requirements, flexible purpose corporations are required to comply with extensive annual reporting standards. These annual reports include financial statements and detailed management discussion and analysis reports. These companies must also provide updates regarding the status of their overriding societal or environmental purposes. In light of the relatively new nature of flexible purpose corporations, the applicable tax and legal provisions have not fully adapted to account for all requirements and standards.

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