CA's Budget & Nonprofits: Part Four
05.25.2023 | Linda J. Rosenthal, JD
Socially conscious entrepreneurs in the Golden State now have two hybrid corporate models available to achieve the goal of “business-with-a-conscience.”
In “Social Enterprises: A Revolution Under the Radar,” we introduced the California “benefit corporation” and the California“social purpose” corporation (formerly called a “flexible purpose” corporation).
In “California Benefit Corporations: An Introduction,” we highlighted the special features of the “benefit corporation” option. It’s authorized by the California Business Corporation Law as a for-profit entity, but there are key distinctions from the traditional business format. Most particularly, directors and officers of a California benefit corporation must focus not only on the bottom-line profit, but also on achieving a “general public benefit,” as well as optional “specific public benefits.”
How, exactly, the corporate directors and officers juggle these multiple purposes is a bit up in the air because this special format has only been around since 2011. The benefit corporation board must make business decisions with an eye on much more than just the financial bottom line. It’s required to take into account the “triple bottom line” of “profits, people and planet.”
What’s not in doubt, though, is that benefit corporation directors are required once a year to: (1) measure the entity’s success and failures against a third-party standard of accountability; and (2) disclose this assessment in a formal report.
There are some variations among the many U.S. states that have recently authorized a hybrid, benefit corporation
The cornerstone of the California model is a mandatory annual report disclosing five categories of information. The key element is a report of the required comprehensive, consistent assessment of successes and failures based not on subjective analysis, but measured against an objective third-party standard. This assessment description must explain how the corporation pursued its multiple purposes (including the general public benefit and any identified specific public benefits), how well these purposes were achieved, and if – and how – these goals were not achieved.
“The benefit report shall be sent annually to each shareholder …” (“Shall” indicates a mandatory duty.) The due date is “within 120 days following the end of the fiscal year of the benefit corporation or at the same time that the benefit corporation delivers any other annual report to its shareholders.”
In addition to delivering the report to shareholders, a “benefit corporation shall post all of its benefit reports on the public portion of its Internet Web site, if any.” If there’s no web site, then the corporation must provide the report, “without charge, to any person that requests a copy.”
Good news, though: The corporation doesn’t have to post or provide information about its directors’ compensation, or any “financial or proprietary” material.
There are five sections of required explanation and information: (1) a narrative description; (2) an assessment; (3) certain identifying information; (4) a statement describing failures, if any; and (5) a statement of connection, if any, with the creators of the third-party assessment-standard that is used.
The hybrid corporate format comes with huge benefits to socially conscious entrepreneurs and to the general public, but this is balanced by fairly stringent assessment and disclosure requirements.