California Hybrid Corporations San Diego
California Hybrid Corporation San Diego Summary
Benefit Corporation (B-Corp) and Flexible Purpose Corporation
On January 1, 2012, the Corporate Flexibility Act of 2011 (California Corporations Code §§ 2500–3503 and California Corporations Code §§ 14600–14631), brought flexible purpose corporation and the benefit corporation, respectively, into existence in California as two new stock corporations. These hybrid corporations combine the for-profit shareholder structure of a traditional corporation with the social-benefit purposes of a non-profit corporation, allowing entrepreneurs and investors to take advantage of the corporate structure as a means to promote both economic and socially beneficial ends.
Low-profit Limited Liability Company (L3C)
Another type of hybrid entity that has been gaining attention is the low-profit limited liability company, or L3C, that, at the time of this writing, is allowed in nine states (Illinois, Louisiana, Maine, Michigan, North Carolina, Rhode Island, Utah, Vermont, and Wyoming), but not California. The L3C form must be organized primarily for furthering a charitable purpose and may not significantly pursue financial return; in many ways it is similar to the hybrid corporations of California, which makes the L3C worth mentioning here. However, since the L3C is not currently available in California, it is only mentioned here for reference.
California Hybrid Corporation Questions?
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Michael J. Leonard helped us obtain our 501(c)(3), created our bylaws, and completed all of the necessary forms to establish a tax exempt status for our non-profit foundation. He was professional, quick, and great to work with. Mr. Leonard is also very connected in the community and has referred us to useful contacts.
Michel Sproles, Sproles Empowered Youth
My experience working with San Diego Corporate Law has been nothing short of excellent. Michael Leonard is a tremendous asset, and provided us much needed assistance when forming our insurance agency. He assisted with the formation of our corporation, buy / sell agreement, company bylaws, minutes, and stock certificates. Michael is an utmost professional that I would refer to any friend or client.
Michael Fusco, Fusco & Orsini Insurance Services, Inc.
Michael J. Leonard at San Diego Corporate Law has provided GWR valuable assistance and professional advice. As a San Diego based high tech equipment manufacturer, we appreciate that we never have to waste his or our time explaining the engineering or scientific details of our situation as his strong, hands on physics and engineering background is invaluable. We are well protected with Mike looking out for our interests.
Richard Reineman, GWR Instruments, Inc.
In 2009 San Diego Corporate Law converted my Sole Propriety Engineering Company into a “S” Corporation. My experience was painless and Mr. Leonard has done an excellent job staying in contact and continues to be a great advisor. San Diego Corporate Law comes highly recommended.
Curtis Patterson, P.E., Patterson Engineering, Inc.
Michael J. Leonard at San Diego Corporate Law is not your typical attorney experience. Michael puts his full attention into understanding your needs and provides the best solution to meet your goals. I highly recommend San Diego Corporate Law to any of my friends and associates.
Jeff A. Mudd, Best-Rate Repair Company, Inc.
Working with San Diego Corporate Law made dealing with all the paper work of incorporating and setting up my business a dream! Michael is the ultimate professional and knows corporate law inside and out! San Diego Corporate Law is always available to answer questions, assist me with follow up items, and be my go-to and support team.
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Mr. Leonard is competent, dependable, and gets the work done on time and within budget. He is very responsible to his customers. We would recommend him to anyone that requires a true professional.
Lidija Skolnija, anaZana, Inc.
I was recommended to Michael to help me set up a new corporation I was starting. The advice he gave me was great, and I eventually hired his services to create the agreements and contracts between myself and my business partner. Throughout the process he guided me and asked very detailed questions. I felt that he had my back and my best interest at heart. Looking back now, the contracts he wrote have saved me close to $40,000 in money that I would have otherwise had to pay. Thank you Michael. Everyone should follow your standards.
Jason Delfos, Marketing and Advertising Design Group, LLC
We hired San Diego Corporate Law to help us establish our business in San Diego. In the initial stages of setting up our business and transitioning to California, we were frequently out of town. During this time, Michael answered questions promptly and thoroughly by phone and email. He went above and beyond to keep us on deadline for our aggressive schedule. I would not hesitate to recommend San Diego Corporate Law to another business owner.
Alicia Sorber-Gallegos, Two Men and a Truck
Having no prior experience with business law, I approached Michael to help me set up an LLC for my new company and help me review my legal disclaimers. Michael was very straightforward, honest and helpful. He took the time to explain every detail and answer all of my questions. His work was very diligent and completed exactly by the deadline promised. Michael and San Diego Corporate Law hold my highest recommendation!
Anton Ivanov, Dreams Cash True
Michael J. Leonard helped me configure my business entities into a solid investment vehicle. He is very professional, knowledgeable, easy to reach and timely. San Diego Corporate Law produced a unique and informative Private Placement Memorandum (PPM) for my business for less than half the cost other law firms were charging. I expect to use the PPM and San Diego Corporate Law for many years. I recommend Michael because of his efficient, hands on, practical approach to legal work in a time of dramatic changes with securities laws (JOBS Act).
John Copyak, Clean USA Power, Inc.
San Diego Corporate Law helped me set up MGIV Inc and get established as an S-corp in 2013. I was a one man show and didn’t have a substantial amount of money to spend to get started. I was in the process of filing for a LLC through Legalzoom.com when something didn’t feel right. I picked up the phone and asked Michael if he was available to help. This was my first business so I knew nothing about filing for a corporation or legally establishing a business. Using his knowledge and expertise he coached me toward filing for an S-corp instead of an LLC. It saved the corporation $800 in 2013 and positioned it for success based on the MGIV Communication Consulting model. I find comfort knowing that my business is in good hands. Michael is a great resource and very personable so working with him is convenient and affordable! I recommend San Diego Corporate Law to anyone needing legal assistance with their business!
Michael Gordon IV, MGIV, Inc.
When I needed to move my business from an office suite to a brick and mortar location, San Diego Corporate Law was instrumental in ensuring that the lease provisions were in my best interests. The specialized skills that Michael and his team possess, the fair and transparent fee structure, and their professional yet low pressure consultation process are the reasons why I will retain their services in the future.
Scott Weathers, Alpha Graphics La Jolla
Michael J. Leonard at San Diego Corporate Law not only helped us establish our small business in San Diego, but he helped us to solidify our partnership to avoid any gray areas as we are a family-run business. Michael was easy to work with, knowledgeable, responsive, and professional, and we will continue to use him as our company lawyer moving forward.
Karen Posner, Camp Run-A-Mutt Sorrento Valley
I have nothing but compliments to say about San Diego Corporate Law. Michael and his team have always delivered not only an extremely high level of service, but also have been so patient through the whole process of setting up our LLC. Whenever I have questions or need their service, they are very easy to communicate with and very reasonably priced. I will not only use them for any legal advice that I may need in the future, but also refer all the people that may also need their services.
Andrey Kamogari, Kamo Housing
Michael assisted us with the process of incorporating our non-profit organization. Michael was responsive to all of our questions, and sensitive to the expedited timelines that we encountered. Among the best aspects we experienced in working with Michael was his appreciation for our specific goals and his candid and honest guidance to accomplish those objectives. I would highly recommend Michael Leonard and San Diego Corporate Law.
Esther Hemmen, Mending Matters
San Diego Corporate Law has been a crucial partner for Little Black Diamond. Whether it’s routine incorporation paperwork or complex employment law, Michael is always very responsive and available to help handle our legal issues. He takes the time to understand your business and the unique issues that surround it in order to provide accurate and timely advice that considers the best interest of your business. San Diego Corporate Law is a true partner for any business.
Adam Rosenberg, Little Black Diamond, LLC
California Hybrid Corporation San Diego Details
Hybrid Corporations Versus Conventional For-Profit Corporations
A conventional, for-profit California corporation may only include a general statement of its purpose in its articles of incorporation, and while such general statement may contain additional text to limit the purpose of the corporation, no further purpose or additional purpose is permitted. California Corporations Code § 202. Additionally, a director of a conventional, for-profit California corporation is required to perform his or her duties in the manner he or she believes to be in the best interests of the corporation and its shareholders, which is generally interpreted to mean the maximization of shareholder profits. California Corporations Code § 309(a).
California hybrid corporations were designed for entrepreneurs and investors seeking to accomplish a social objective as a corporate purpose in addition to creating shareholder profits. California hybrid corporations:
May (flexible purpose corporations must) state the social purpose of the corporation in the articles of incorporation and state that the purpose of the corporation is not exclusive to generation of financial return. California Corporations Code §§ 2602(b)(2), 14610.
May authorize directors to take noneconomic factors such as employees, the community, and the environment into consideration, in addition to the maximization of shareholder profits, when making business decisions and offer directors legal protection for those considerations that otherwise might violate the fiduciary duties of a director to the shareholders of a company. California Corporations Code §§ 2602(b)(2)(B), 14620(b).
Require a supermajority vote in order to change the corporation’s social mission, making it more difficult for investors to divert the corporation from its social mission. California Corporations Code §§ 3000(b), 14601(d), 14610(d).
Require annual reports on the social benefit of corporate activities to increase transparency for investors concerned about social goals. California Corporations Code §§3500, 14630.
Tax Treatment of California Hybrid Corporations
California hybrid corporations are treated the same as conventional, for-profit corporations for purposes of federal or California tax law. California hybrid corporations may be C corporations or elect to be treated as S-corporations, as permitted under federal tax law. California hybrid corporations are not eligible for federal or state income tax-exemption and cannot offer charitable tax deductions in exchange for contributions as may be done with a non-profit corporation.
However, states and municipalities may offer tax or other benefits to hybrid corporations in preference to other business entities. An example of this is the California Benefit Corporation Discount Ordinance that provides preferential treatment for benefit corporations that bid on city contracts. San Francisco Admin C chap 14C, §§ 14C.1–14C.3.
Comparing the Hybrid Corporations
While the underlying premise of both hybrid corporate forms is to promote social purposes in a corporate form and allow directors to consider more than just the maximization of profits when making business decisions without incurring liability to shareholders, California flexible purpose corporations and California benefit corporations each use a different approach toward accommodating social purposes.
Material Public Benefit Versus Special Purpose.
Benefit corporations are required to create “a material positive impact on society and the environment,” while a flexible purpose corporation must only consider the special purpose in its articles of incorporation rather than generate a general public benefit. California Corporations Code § 14601(c).
Benefit corporations do not permit incremental changes in social objectives; either a company meets the general public benefit test or it does not. The general public benefit is measured against a third party standard, but there is no government role in determining the acceptability of a third party standard, the qualification of the third party setting a standard, or which particular set of third party standards is adopted by a particular benefit corporation. Also, there is no audit or certification required to be conducted by any third party standards organization.
California flexible purpose corporations are permitted to adopt a special purpose and to focus only on meeting such special purpose, as opposed to providing a general public benefit; this permits even small corporations to meet flexible purpose requirements.
Standard for Assessment
The general public benefit derived from operation of a California benefit corporation must be measured on an annual basis by a third party standard. California law does not establish such third party standards, so it is up to the directors of each California benefit corporation to find a third party to set the general public benefit standard. California flexible purpose corporations require no third party standards and rely solely on reporting to investors regarding how well the California flexible purpose corporation is meeting the special purpose stated in its articles of incorporation.
Director Fiduciary Duties
The directors of a California benefit corporation must consider the impacts of any action or proposed action on its employees, the environment, and the community, as well as other constituents, when deciding which suppliers to use, which contracts to accept, and what services to provide. California Corporations Code § 14620(b). There is not yet any guidance from the law regarding how factors should be weighed, what priority should be given to factors, or how the factors should be documented in the board of directors meeting minutes. California flexible purpose corporations do not require directors to take these factors into account, although directors are permitted to do so. Directors of a California flexible purpose corporation must consider how actions or proposed actions will impact the special purpose or purposes listed in its articles of incorporation, but may also consider other factors. California Corporations Code § 2700(c).
California benefit corporations must report on the overall public benefit of the corporation, not just on one or more special purpose of the California benefit corporation. California flexible purpose corporations are allowed to only report with regard to the special purpose or purposes listed in articles of incorporation and are not required to provide report overall impacts of the business.
California law includes a right of action for enforcement of the benefit to be provided by a California benefit corporation. California law provides shareholders of California benefit corporations the right to hold directors accountable for failure to create a material positive impact on society or to consider the impact of decisions on employees, the community, and the environment, and the board of directors of a California benefit corporation must certify compliance with the public benefit criteria. California Corporations Code § 14601(g).
California law relies on accountability to investors for enforcement of the special purpose or purposes of California flexible purpose corporations. California flexible purpose corporations do not provide any means for enforcing a special purpose that might create liability for directors because the goal of the flexible purpose corporation is to permit innovation and an unfettered application of directors’ business judgment in balancing a special purpose and maximizing shareholder value.
California Hybrid Corporation Questions?
Send us an Email or call us at 858.483.9200