When deciding what business entity type to use for your social enterprise, you should start by considering the factors that all businesses should consider at the formation stage. Once you have decided on an entity type, you should consider where to incorporate your social enterprise. If you plan to establish a flexible purpose corporation, then California is your only choice. But if you set your sights on creating a benefit corporation, then you can choose from a number of states. See this article for information on the differences between benefit corporations and flexible purpose corporations in California.
Delaware vs. California Benefit Corporations
In a separate post, we discussed the reason why many businesses incorporate in Delaware and why professional investors often prefer to invest in Delaware corporations. Because the corporate laws of any given state generally apply to benefit corporations, as a starting point, impact investors may prefer to invest in Delaware benefit corporations based on their familiarity with Delaware’s laws. But California benefit corporations should not necessarily be ruled out as an entity type that will attract impact investment. Because benefit corporations have only come about recently, there is little empirical data on whether investors prefer to invest in Delaware benefit corporations over other states’ benefit corporations (the state of incorporation is probably not the driving factor for impact investors – the ability to achieve measurable impact and a sustainable business model is likely the driving factor!).
Here are some differences for social entrepreneurs to consider when choosing between a Delaware vs. California Benefit Corporation:
California Benefit Corporation
Delaware Benefit Corporation
Name of Enterprise
|Same as other corporations (name must end with “Corporation,” “Company,” “Incorporated,” “Limited” or an abbreviation of one of those words)||Must include the words “Public Benefit Corporation” or an abbreviation of those words|
Purpose of Benefit Corporation
|Requires enterprise to provide general public benefit (“a material positive impact on society and the environment taken as a whole”)Permits enterprise to specify a specific public benefit (e.g. “improving human health”)2/3 vote required to change general or specific purpose||Requires enterprise to provide a general AND specific public benefit2/3 vote required to change general or specific purpose|
Standard for Evaluation of Benefit Purpose
|Evaluation must be based on an independent third party standard||Internal assessment is permitted (but biennial statement must specify the standards/criteria used for assessment)Enterprise may require a third party standard by specifying the requirement in certificate of incorporation|
Reporting Frequency and Distribution
|Annual benefit report to shareholders and posted on enterprise’s website within 120 days of the end of the fiscal year||Biennial statement to shareholdersEnterprise formation documents may require more frequent assessments|
Merging Existing Business Into a Benefit Corp
|Requires 2/3 vote of outstanding shares||Requires 90% vote of outstanding shares|
Enforcement Rights of Shareholders
|Any shareholder may bring a derivative action in a benefit enforcement proceeding (with no money damages available; but reimbursement of fees and expenses incurred in proceeding are available) to require enterprise to pursue public benefit purpose(s), or to assess or issue benefit report.||Shareholders who individually or collectively hold 2% of the outstanding shares may bring a derivative action for breach of duties owed by Board of Directors to “balance the pecuniary interests of the stockholders, the best interests of those materially affected by the corporation’s conduct, and the specific public benefit or public benefits identified in its certificate of incorporation.”|
Contact us to discuss whether a California or Delaware benefit corporation would better serve your goals.
DISCLAIMER: The information in this article is provided for informational purposes only and should not be construed or relied upon as legal advice. This article may constitute attorney advertising under applicable state laws.