What is a benefit corporation?
Whether you are a nonprofit or for-profit or something in between, you have probably heard the buzz about a new corporate form in California called the “benefit corporation”. I’ve been answering a lot of questions from current and potential clients about the benefit corporation and other types of social purpose legal structures (e.g., flexible purpose corporation, tandem structures, low-profit LLC or L3C), so I’ve outlined the basics of the California benefit corporation in this post.
As of January 1, 2012, new start-ups and existing entities can take advantage of a new corporate form which allows directors to put purpose in front of profit. New start-ups can incorporate as benefit corporations (by filing Articles of Incorporation with the CA Secretary of State), and existing entities can convert to become benefit corporations (by vote and amendment of organizing documents).
How is a benefit corporation different from a regular corporation?
You might be surprised. There’s been a lot of publicity about the benefit corporation (at least in the social sector) – this buzz implies that the new corporate form is substantially different from the regular corporate form. It’s not. Also, the benefit corporation is often referred to as a “hybrid” legal form or structure, implying that it is half nonprofit, half for-profit. It’s not that either. The benefit corporation is a traditional, for-profit corporation with a key difference: its directors are allowed to prioritize social and environmental objectives ahead of profit. (I don’t mean to imply that the benefit corporation is not an important step towards greater social and environmental responsibility in the private sector – it most certainly is. I discuss positive impact below.) I do think it’s worth mentioning that the major features of traditional and benefit corporations are the same, including one key similarity: a benefit corporation is still taxed in the same way as a traditional corporation, i.e., there is no tax advantage associated with carrying out social or environmental objectives. Contrast this to the preferential tax treatment that many charitable nonprofit organizations are granted as a result of carrying out activities that the IRS deems worthy of tax-exemption.
If the corporate forms are not so different, what’s special about the benefit corporation?
The following features distinguish a benefit corporation from a regular corporation:
1) the organizing documents of a benefit corporation must state a general public benefit, defined as a material positive impact on society and the environment, and may also state one or more specific public benefits
2) benefit corporation directors are mandated to consider the impact of corporate actions on shareholders, employees, customers, the community, the local and global environment, and the interests of the corporation itself
3) the benefit corporation’s ability to accomplish its stated public benefit is assessed on an annual basis against an independent, credible third-party standard
4) the benefit corporation is required to report its overall social and environmental performance in an annual benefit report, distributed to shareholders and available to the public on the corporation's website
Why adopt the new form?
Despite the similarities between traditional and benefit corporations, the new corporate form is a big deal. And despite the more stringent reporting and third-party assessment requirements for benefit corporations, the new corporate form will be an attractive and worthwhile option for many corporations that pursue social and environmental goals. I think what gets people excited is that the new corporate form marks a significant shift from the deep-rooted corporate principle that directors have fiduciary duties to maximize shareholder value. The law in California and a growing number of other states finally recognizes those entities that embed a social purpose into their business model and holds those entities accountable to that purpose. Directors have protection from shareholder attacks regarding corporate actions such as resisting a takeover or prioritizing among social, environmental, and financial goals. Shareholders have rights to hold the corporation accountable to purpose as well as profit. Other benefits include greater public trust and goodwill, the ability to attract investors interested in social returns, and the positive social and environmental impact created by the corporation’s activities.
There’s so much more I could go on about, and I will do so in future posts. As always, please contact me if you’re interested in continuing the conversation.