It has been a busy year for proponents of new legal forms. The benefit corporation goes into effect in Virginia on July 1. Benefit corporation legislation has also been introduced in California, Colorado, Hawaii, North Carolina, Pennsylvania, and Michigan. Maryland, the first state to pass benefit corporation legislation, recently authorized LLC versions of the benefit corporation.

The low-profit limited liability company (L3C) has had a tougher time in 2011. Legislation was signed into law in Rhode Island, and voted down in committee in Arizona.

California has added its own twist to the push for a new legal form. California legislators are considering two bills: a bill for the creation of the benefit corporation and another for the creation of the flexible-purpose corporation. According to R. Todd Johnson, one of the architects of the flexible-purpose corporation, the activity in California means that entrepreneurs and social entrepreneurs now have a choice. “California appears poised to be the first state in the United States that will offer entrepreneurs and investors a choice of models for creating social enterprises.”[1]

What is the choice exactly that entrepreneurs and investors will have, not only in California but across the country? Here is a brief breakdown:

Branding: A survey of early L3C adopters found that the form is valued by entrepreneurs because it more accurately represents their dual social and profit purposes.[2] Depending on the state they are in, entrepreneurs can choose among a menu of legal options in deciding how to signal their intention to be socially responsible. They may choose to signal a commitment to pursue a general public benefit in addition to profit by incorporating as a benefit corporation. In the near future California entrepreneurs may be able to brand themselves as flexible purpose corporations that pursue a specific social purpose laid out in a corporation’s articles of incorporation. Alternatively, entrepreneurs could become a low-profit limited liability company that pursues a charitable, not a profit-making, purpose.

Discretion: Entrepreneurs and investors can choose how directors will be held accountable for the corporation’s social purpose and what sort of disclosure they want from a socially responsible business. Benefit corporation legislation provides broad discretion to directors to make decisions based on social and profit factors. Investors can hold directors accountable, however, by suing where there is a failure to pursue a general public benefit. Similar to the benefit corporation, the flexible purpose corporation, if signed into law, affords discretion and protection to directors who make decisions where there is trade-offs between mission and money. Typical L3C legislation provides that a company’s failure to pursue a charitable purpose will simply result in the company being classified as a regular LLC instead of an L3C. Any other requirements are to be laid out in a company’s articles of incorporation and operating agreement.

Disclosure: Levels of required disclosure vary from form to form. Benefit corporations must assess their environmental and social impacts and provide a public report of the result. Flexible purpose corporations would have to produce annual reports that assess the corporation’s progress in achieving its special purposes. The L3C legislation typically does not require any disclosure beyond a statement of its charitable purpose in the articles of incorporation.

Tax Treatment: Entrepreneurs and investors can choose whether to receive the pass-through tax treatment of the L3C or the corporate tax of the benefit corporation and flexible purpose corporation.

That’s the nuts and bolts for now. And now I’m curious: If you were to choose, which one would it be and why?