Flexible Purpose Corporation

A corporation has the option of organizing as a Flexible Purpose Corporation (“FPC”) if the company is a for-profit corporation that pursues public purpose objectives, such as environmental well–being. The FPC status is an especially beneficial mode of organization that incorporates the benefits of both non-profit and for-profit corporations. At the Law Offices of Salar Atrizadeh, an experienced attorney with extensive experience and knowledge in corporate law and business organizations can assist in educating you about the best form of organization for you and your business.

The Corporate Flexibility Act of 2011 (“CFA”), codified under California Corporations Code §§ 2500-3503, governs FPCs. However, FPCs are also subject to California’s General Corporation Law, unless a specific section expressly provides that it does not apply to FPCs. An FPC may combine environmental, social, and other public interest objectives with an intent to make a profit. Nonetheless, an FPC does not receive any special tax benefits, regardless of its public service objectives. Therefore, an FPC is taxed as a for-profit corporation under federal and state taxation laws. However, an FPC does reserve the right to elect to be taxed as an S–Corporation.

An FPC, is also similar to any other corporation organized under California’s General Corporations Code in that an FPC has broad authority to engage in any business that complies with its Articles of Incorporation and any applicable state or federal laws. However, an FPC is uniquely limited in that under California Corporations Code §§ 2604 and 2605(a), any such business must comply with the FPC’s special purpose.

In general, the board of directors (individuals elected to represent the corporation’s shareholders) of an FPC has the same duties as the directors of a corporation organized under California’s General Corporation Law. However, directors for FPC’s have a few significant variations in their duties. For example, FPC directors are similar to directors of generally organized corporations in that both owe a duty to perform their responsibilities in a good faith manner that is in the best interest of the corporation. Also, an FPC director may rely on corporate officers and employees to the same extent as directors of corporations organized under the General Corporations Law. However, pursuant to Corporations Code § 2700(c), FPC directors are uniquely able to consider the factors that the director deems to be important in preserving the corporation’s prospects, interests, and purpose as set forth in the corporation’s articles of incorporation.

In an FPC, shareholders may bring a derivative action suit (a suit where a shareholder sues the rest of the shareholders on behalf of the corporation) exactly as shareholders in a corporation organized under the General Corporation Law. However, Corporations Code § 2900 provides that in an FPC, no other party except a shareholder may bring a derivative suit. This section intends to establish that beneficiaries of the FPC’s public interest activities do not have standing to bring suit (i.e., do not have the right to file a formal lawsuit) against the corporation’s shareholders, and to preserve judgments of the shareholders and directors from outside parties.

Here are the key characteristics and features of a Flexible Purpose Corporation in California:

1. Purpose: Similar to Public Benefit Corporations, Flexible Purpose Corporations are designed to pursue a social or environmental purpose in addition to financial gain. However, unlike Public Benefit Corporations, Flexible Purpose Corporations have more flexibility in defining their specific social or environmental objectives.
2. Mission Flexibility: Flexible Purpose Corporations have the flexibility to define their specific purpose in their articles of incorporation, which may include social, environmental, or other public benefit objectives. This allows them to tailor their mission to address a wide range of societal or environmental challenges.
3. Legal Structure: Flexible Purpose Corporations are organized and regulated under the California Corporations Code, specifically under the provisions related to "Flexible Purpose Corporations." These provisions establish the legal framework for forming, operating, and regulating Flexible Purpose Corporations in California.
4. Accountability and Transparency: Similar to Public Benefit Corporations, Flexible Purpose Corporations are subject to certain accountability and transparency requirements. They are required to consider the impact of their decisions on their stated social or environmental purpose and may be required to report on their performance using third-party standards.
5. Governance: Flexible Purpose Corporations are governed by a board of directors responsible for overseeing the corporation's affairs and making decisions on behalf of the organization. The board of directors may include officers such as a president, secretary, and treasurer.
6. Shareholder Rights: Shareholders of Flexible Purpose Corporations have certain rights related to the corporation's social or environmental purpose, including the right to bring legal actions if they believe the corporation is failing to pursue or fulfill its stated objectives.
7. Annual Reporting Requirements: Flexible Purpose Corporations may be required to prepare and publish an annual report assessing the corporation's performance in achieving its social or environmental objectives. This report may be made available to shareholders and the public and may be filed with regulatory authorities.

Flexible Purpose Corporations in California provide an alternative corporate structure for businesses seeking to integrate social or environmental goals into their operations while still pursuing financial profitability. By offering flexibility in defining their mission and purpose, Flexible Purpose Corporations aim to promote innovation and creativity in addressing societal and environmental challenges.

Flexible Purpose Corporations are governed primarily by the provisions of the California Corporations Code that relate to "Flexible Purpose Corporations" (Sections 2500-3503). These provisions establish the legal framework for the formation, operation, and regulation of Flexible Purpose Corporations in California. Here are the key laws and regulations that govern California Flexible Purpose Corporations:

1. California Corporations Code Sections 2500-3503: This section of the California Corporations Code specifically addresses Flexible Purpose Corporations. It outlines the requirements and regulations for forming and operating this type of legal entity in California, including provisions related to the corporation's purpose, accountability, reporting, and governance.
2. Articles of Incorporation: Flexible Purpose Corporations must include specific language in their articles of incorporation to indicate that they are organized as Flexible Purpose Corporations and to identify their flexible purpose. The articles of incorporation must comply with the requirements set forth in the California Corporations Code.
3. Directors' Duties and Liability: Directors of Flexible Purpose Corporations have a duty to consider the corporation's flexible purpose when making decisions and managing the affairs of the corporation. Directors may be protected from liability for decisions made in good faith pursuit of the corporation's flexible purpose objectives.
4. Shareholder Rights: Shareholders of Flexible Purpose Corporations have certain rights related to the corporation's flexible purpose, including the right to bring legal actions if they believe the corporation is failing to pursue or fulfill its stated objectives.
5. Annual Reporting Requirements: Flexible Purpose Corporations may be required to prepare and publish an annual report assessing the corporation's performance in achieving its flexible purpose objectives. This report may be made available to shareholders and the public and may be filed with regulatory authorities.
6. Legal Standards for Flexible Purpose Corporations: The California Corporations Code establishes legal standards and requirements for Flexible Purpose Corporations, including provisions related to the corporation's purpose, accountability, transparency, and governance. These standards ensure that Flexible Purpose Corporations operate in a manner consistent with their flexible purpose objectives while still maintaining their status as for-profit entities.
7. Additional Regulations and Guidelines: In addition to the California Corporations Code, Flexible Purpose Corporations may be subject to regulations, guidelines, and interpretations issued by regulatory agencies, such as the California Secretary of State. These additional regulations and guidelines provide guidance on compliance with state laws and regulations governing Flexible Purpose Corporations.

In summary, the California Corporations Code, specifically the provisions related to Flexible Purpose Corporations, serves as the primary legal framework governing Flexible Purpose Corporations in California. Compliance with these laws and regulations is essential for the proper formation, operation, and governance of Flexible Purpose Corporations in the state.