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California Proposes to Create New Corporate Entity for Environmentally/Socially Conscious Companies

September 8, 2011 | Posted by Maureen Gorsen | Topic(s): Corporate – State, State and Local Tax Incentives

The two bills have just passed the California Legislature that would allow companies to become a benefit corporation (AB 361) or a flexible purpose corporation (SB 201), fundamentally changing California’s Corporations Code.

Under either law, California would allow a new type of corporation if part of its mission is to improve society and the environment, and the corporation creates a “general public benefit” or “material positive impact on society and the environment.”

According to advocates of the proposed legislation, the new corporate entity is necessary because "the legal issue of fiduciary responsibility has long been used as a barrier by companies who prefer or are deterred from taking proactive social and environmental steps. In many cases, this law regarding fiduciary responsibility has given companies legal cover to avoid substantive action to clean up pollution, adopt greener chemicals or avoid sweatshop sourcing."

By creating a new legal entity, the advocates hope to allow a company "to include a social and environmental mission that is given equal weight, perhaps even greater weight, than profits." Recent laws passed by the California Legislature have asked companies doing business in California to take on more environmental and social responsibilities in their global supply chain (see, e.g., anti-slavery) The advocates of the two bills promise that this is just the beginning as many laws and regulations will be needed in order "to transform mainstream business to pursue environmental and social goals as aggressively as they do financial ones."

Creation of the new legal entity will also set forth a path for preferential treatment under tax, government contracts, and environmental regulation.

Specifically, the bills do not address the tax treatment of benefit corporations or flexible purpose corporations under California law. Thus, if the bills pass, it appears that these new legal entities will initially be treated like other California corporations for tax purposes. It is logical for us to speculate, however, that the California Legislature will gear future tax incentives toward such entities, given the societal and environmental benefits that they are intended to provide. Such incentives could include, for example, corporate income tax credits for creating jobs in California or for relocating a headquarters to the state.

Governor Brown has until October 9th to sign or veto these bills.