Flexible and Benefit…California’s Two New Golden Words.

Posted on October 25th, 2011 by Hub LA Member

By Shaheen Sheik of Esse Law

If you’re like most social entrepreneurs, you’re tapped into the community.  And if you’re tapped in, you’ve likely heard that at the midnight deadline on October 10, Governor Brown signed into law two bills that affect our world of do-gooders:  AB 361 (The Benefit Corporation Legislation) and SB 201 (The Flexible Purpose Corporation).  Let’s call these two BenCorp and Flex Law, respectively.  The bird’s eye view: these two laws legally sanction corporate structures to make social benefit a core tenet of their business model and by doing so, require them to adhere to certain standards that focus on ensuring they maintain their commitment to social benefits.

First off, BenCorp Law is not that long, so if you are one of those legislative geeks that I love, I’d say to go ahead and read it.  Flex Law by contrast, is a bit heftier, but still worth a readif you are into all the legalese.  The first question I get asked by most people is, “what is the difference between the two laws?”  Let’s start with what’s similar.

Both laws require that the corporation specify a social benefit (or special purpose) in their articles of incorporation, both require the business to maintain a certain amount of transparency with annual reporting, and neither requires that the social benefit trumps profit (unlike typical L3C legislation).  A stark difference between the two is that BenCorp Law requires third-party certification and Flex Law does not.  Not surprising, BenCorp Law was originally crafted by B Lab, an organization in the business of third-party certification.   This is not an accusation, just a fact.

The second question social entrepreneurs ask me is, “so which one should my company become?”  That’s a tougher question.  The trick here is that these laws are new and from a first pass, these laws seem to have a lot of similarities.  When you ask those involved in the legislation drafting, the term ‘complementary approaches’ is used, which triggers my lawyer brain to think we may be on a road to confusion initially while we figure out how these laws play out in practice.  I wish I had a clear answer to the question.  I don’t.  I also can’t be sure that I’d always recommend social enterprises avail themselves of the laws.  (I know that statement may give rise to a resounding, “Why not?!?”  Maybe a longer discussion best left for another post?)

For any legislation, you can wonder about the cynical, capital driven reasons it came into being.  With these new social enterprise laws, you can do the same.  Perhaps directors wanted protection and a way to limit their liability if profits were not as high because they pursued social benefits.  Perhaps certification companies want a piece of the action.  Perhaps, perhaps, perhaps…[insert your conjecture here].

I think that BenCorp Law and Flex Law are steps in the right direction.  They help us put a legal framework around social enterprises.  At a most basic level, California law officially recognizes social enterprise as its own distinct category of business.  And while it may seem silly, I’m thrilled that we finally have legal definitions of social entrepreneurship.  As a tribe, we should be able to draw the circle around who we are.  It gives our identity structure by which others can appreciate us.  But most of all, I’m an optimist and like to think that with our imperfect attempts to make the world perfect, perhaps BenCorp Law and Flex Law get us one step closer to creating a world where social justice and sound economics go hand-in-hand.

Shaheen is a Founding Member of Hub LA and the founder of Esse Law Group, a boutique law firm whose mission it is to shift American business to a new sustainable economy.  Readers, though it feels lame to write this last sentence, I must.  Please know that this is a blog post and not anything close to legal advice.

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