Last week we focused on the “Benefit Corporation.” This week, I want to discuss the “Flex-C” or Flexible Purpose Corporation which was signed into California law at the same time as the Benefit Corporation, during October 2011. While these corporate structures have been around for a few years now, they are rarely discussed with new entrepreneurs. If you are a fashion or beauty company looking to integrate a social or environmental cause into your business plan, these new corporation structures may appeal to you.

Similar to a benefit corporation, the process of creating a flexible purpose corporation starts with naming and proclaiming the company to be a flexible purpose corporation within the articles of incorporation.

Articles of Incorporation of Flex-C

The articles of incorporation must contain one of these two statements: (1) that the company intends to pursue a public purpose, in one of that categories that non-profits operate in, or (2) that the company intends to create short-term or long term benefits for the company’s employees, suppliers, customers, creditors, the environment, or community & society. As a fashion company, you may want to work with local artisans, use environmentally friendly manufacturers or donate a portion of your proceeds to helping women become entrepreneurs, and could be acceptable public purposes or non-economic benefits. Whatever the cause, building it into your articles of incorporation helps to ensure that the mission will remain a part of the company, even if management changes overtime.

Reporting Requirements of Flex-C 

Much like a benefit corporation, flexible purpose corporations also must inform investors and the government of their progress through an annual report. This report has to include the financials of the company, an analysis of the management, and steps that the company has taken to progress the social, environmental, or non-economic goal of the company. However, this reporting can be waived if the company has less than 100 shareholders and the waiver of reporting is approved by two-thirds of the outstanding shares.

Ways that Benefit Corporations & Flexible Purpose Corporations Differ

A benefit corporation tends to be a better fit for a company that makes the social or environmental mission the primary purpose, and profit the second purpose. A flexible purpose corporation typically still makes profit gain the primary gain, but it does allow the managers or directors room to make business decisions that are not motivated by profit, essentially allowing the managers more freedom to make choices that may have violated the executives’ fiduciary duties to the company (profit maximization), if the company was a traditional C or S corporation.

When it comes to the annual reporting, a benefit corporation must always give an annual report, and it must be done to third party standards.  The cost of the annual audit and the fees to organizations such as B Corp for annual membership and certification can be too financially draining on a young company. The flex-c lowers the costs by allowing the company to have control over the reporting.

To gain a bit more information about the taxation & reporting requirements, this PDF article from the Los Angeles Bar Association may assist you.

If you are interested in taking the next step to become a benefit corporation or a flex-c, it is important to speak with both an attorney & a tax adviser to understand the impact of this choice. If you would like to contact Law On The Runway, please email Rachel at [email protected]