Benefit corporation

In April 2010, Maryland became the first U.S. state to pass benefit corporation legislation.[10] As of March 2018, 35 states and Washington, D.C. have passed legislation allowing for the creation of benefit corporations:[11]

Connecticut's benefit corporation law is the first to allow "preservation clauses," which allow the corporation's founders to prevent it from reverting to a 'For Profit' entity at the will of their shareholders.[12]

Illinois established a new type of entity called the "benefit LLC," making the state the first to allow limited liability companies the same opportunities afforded to Illinois corporations under the state's benefit corporation law.[13][14]

In December 2015, the Italian Parliament passed legislation recognizing a new kind of organization, named Società Benefit, which was directly modeled after benefit corporations in the United States. This made Italy the first country in the world to make this legal status available across its entire territory.[15][16][17][18][19]

In 2018, Colombia became the first country in Latin America to introduce benefit corporation legislation. In May 2018, the leader of the British Columbia Green Party introduced a bill to amend the Business Corporations Act to incorporate benefit companies in British Columbia, Canada.[20]

Washington created social purpose corporations in 2012 with a similar focus and intent.[21][22]

Historically, United States corporate law has not been structured or tailored to address the situation of for-profit companies that wish to pursue a social or environmental mission.[23] While corporations generally have the ability to pursue a broad range of activities, corporate decision-making is usually justified in terms of creating long-term shareholder value.

The idea that a corporation has as its purpose to maximize financial gain for its shareholders was first articulated in Dodge v. Ford Motor Company in 1919.[24] Over time, through both law and custom, the concept of "shareholder primacy" has come to be widely accepted. This was reaffirmed in 2010 by the case eBay Domestic Holdings, Inc. v. Craig Newmark, et al., 3705-CC, 61 (Del. Ch. 2010)., in which the Delaware Chancery Court stated that a non-financial mission that “seeks not to maximize the economic value of a for-profit Delaware corporation for the benefit of its stockholders” is inconsistent with directors’ fiduciary duties. However, the fiduciary duties do not list profit or financial gains specifically, and to date no corporate charters have been written that identify profit as one of those duties.

In the ordinary course of business, decisions made by a corporation's directors are generally protected by the business judgment rule, under which courts are reluctant to second-guess operating decisions made by directors. In a takeover or change of control situation, however, courts give less deference to directors’ decisions and require that directors obtain the highest price in order to maximize shareholder value in the transaction. Thus a corporation may be unable to maintain its focus on social and environmental factors in a change of control situation because of the pressure to maximize shareholder value.

Mission-driven businesses, impact investors, and social entrepreneurs are constrained by this legal framework, which is not equipped to accommodate for-profit entities whose mission is central to their existence.

Even in states that have passed “constituency” statutes, which permit directors and officers of ordinary corporations to consider non-financial interests when making decisions, legal uncertainties make it difficult for mission-driven businesses to know when they are allowed to consider additional interests. Without clear case law, directors may still fear civil claims if they stray from their fiduciary duties to the owners of the business to maximize profit.[4]

By contrast, benefit corporations expand the fiduciary duty of directors to require them to consider non-financial stakeholders as well as the interests of shareholders.[25] This gives directors and officers of mission-driven businesses the legal protection to pursue an additional mission and consider additional stakeholders.[26][27] The enacting state's benefit corporation statutes are placed within existing state corporation codes so that the codes apply to benefit corporations in every respect except those explicit provisions unique to the benefit corporation form.

Typical major provisions of a benefit corporation are:

Purpose

• Shall create general public benefit.
• Shall have the right to name specific public benefit purposes
• The creation of public benefit is in the best interests of the benefit corporation.

Accountability

• Directors' duties are to make decisions in the best interests of the corporation
• Directors and officers shall consider effect of decisions on shareholders and employees, suppliers, customers, community, environment (together the "stakeholders")

Transparency

• Shall publish annual Benefit Report in accordance with recognized third party standards for defining, reporting, and assessing social and environmental performance
• Benefit Report delivered to: 1) all shareholders; and 2) public website with exclusion of proprietary data

Right of Action

• Only shareholders and directors have right of action
• Right of Action can be for 1) violation of or failure to pursue general or specific public benefit; 2) violation of duty or standard of conduct

Change of Control/Purpose/Structure

• Shall require a minimum status vote which is a 2/3 vote in most states, but slightly higher in a few states

Benefit corporations are treated like all other corporations for tax purposes.[28]

Benefit corporation laws address concerns held by entrepreneurs who wish to raise growth capital but fear losing control of the social or environmental mission of their business. In addition, the laws provide companies the ability to consider factors other than the highest purchase offer at the time of sale, in spite of the ruling on Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc. Chartering as a benefit corporation also allows companies to distinguish themselves as businesses with a social conscience, and as one that aspires to a standard they consider higher than profit-maximization for shareholders.[29] Yvon Chouinard, founder of Patagonia, has written "Benefit Corporation legislation creates the legal framework to enable companies like Patagonia to stay mission-driven through succession, capital raises, and even changes in ownership, by institutionalizing the values, culture, processes, and high standards put in place by founding entrepreneurs."[30]

There is a difference between being a Certified Benefit Corporation and filing as a Public Benefit Corporation. Certified Benefit Corporations voluntarily promise to run their firm with social and environmental causes as a concern.[31] To receive their certification from B Lab they must score a minimum of 80 out of 200 on a survey called the B Impact Assessment.[31] Next, they will have to pass through an audit process.[31] Finally, the firms wishing to remain certified will be required to pay an annual fee to B Lab.[31] Furthermore companies will pledge to incorporate as a public benefit corporation before their re-certification.[31]

A Public Benefit Corporation is a legal entity that is organized and taxed as either an S corporation or C Corporation.[31] Founders will want to keep in mind that C-Corporations experience a double tax associated with profits and again with dividends or payouts to shareholders.[32] S Corporations are a legal entity that escapes this double taxation but there are certain stipulations that an entity will have to consider before being able to file as an S Corporation.[32] If you are currently an S or C corporation your company will not change its tax status when you transfer to a Public Benefit Corporation.[31] If you are currently an Llc., partnership or Sole Proprietorship then you will have to change tax status.[31] While Public Benefit Corporations are taxed the same as their underlying corporation status, there is added benefit to taxation on charitable contributions. If a firm makes donations to a qualifying non-profit the charitable contributions receive a tax deductible status. This will lower a firm’s taxes compared to a typical C-corporation that is not donating money and only focusing on short term profits.

Changing your status to a public benefit corporation allows the directors and founders the protection from being sued by shareholders for pursuing decisions that benefit the public but could hurt short term profits.[31] Furthermore, firms that transition typically experience advantages in retaining employees, increasing their customer loyalty and attracting prospective talent that will mesh well into the company culture.[31]

Changing status to a Public Benefit Corporation requires a few guidelines. First, the Articles of Incorporation should choose one or more specific public benefit projects that the firm will pursue.[31] Next, the Articles of Incorporation should be amended to state that the firm is a Public Benefit Corporation in the beginning of the articles.[31] Additionally the term public benefit corporation PBC or another abbreviation may be added to the entity’s name if the founders choose to do so.[31] Finally the share certificates that are issued by the entity should state that the firm is a public benefit corporation.[31] To do this, entities must have a shareholder vote to amend the articles.[31] This will include non-voting shares.[31] The vote will have to gain a two-thirds majority to be passed, depending on your Articles of Incorporation.[31] Shareholders should be notified early that dissenter’s rights apply. Dissenter’s rights mean that those that vote against the amendment and qualify may require the company to buy out their shares at fair value before the change occurs.[31] Firms making the transition should also perform a “due diligence review” of their business contracts, affairs and status in order to avoid any unforeseen liability associated with changing their form of entity.[31]

The transition process itself is different state by state but for Colorado it goes as follows. First, the firm must prepare the aforementioned amended articles.[31] Then, they also amend their bylaws and assign responsibilities to their directors.[31] Next, the amendments must be approved by the board of directors before going to a shareholder vote.[31] Finally they will file the amended articles of incorporation with the secretary of the state.[31]

The previous paragraph outlines how the transition process typically looks for existing corporations but it is different if the previous entity is an Llc. or partnership.[31] For these entities you will first have to prepare the articles of incorporation themselves and the related bylaws.[31] Then file with the state secretary.[31] Only then will it be possible to merge or transition the previous form into the benefit corporation.[31]

According to William Mitchell Law Review, about 68 million US customers have a preference for making decisions about their purchases based on a sense of Environmental or Social responsibility.[33] Some individuals even go as far as using their purchases to "punish" companies for bad corporate behavior when it pertains to environmental or social cause.[33] While others do the opposite, and use their purchasing power to reward firms that they believe are doing social or environmental good.[33] The Mitchell Law Review also states that around 49% of Americans have at some point in time boycotted firms whose behavior they see as "not in the best interest of society."[33] Recent research also suggests that when variables like price and quality are held constant, 87% of customers would switch from a less socially responsible brand to a more socially responsible competitor[33]

• Flexible purpose corporation
• B Corporation (certification)
• Green America
• Low-profit limited liability company
• Community interest company
• Impact investing
• Public-benefit corporation
• Socially responsible investing
• Stakeholder theory
• Social Purpose Corporation
• Workplace spirituality
• Kickstarter and Change.org, two examples of Delaware benefit corporations

Wikiversity has learning resources about Benefit corporation

• Social Enterprise Law Tracker – Interactive map visualizing the progression of benefit corporation legislation across the United States
• BenefitCorp.net – Information about creating and running benefit corporations
• Vermont benefit corporation statute – an example of legislation
• California benefit corporation statute
• Benefit Corporation Gateway – DePaul University-sponsored resource that aggregates and organizes benefit corporation research and guides.