Benefit corporation

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Map of U.S. states which have passed laws allowing the formation of benefit corporations: Passed into law. No existing law. Bill failed a vote in the state's legislature. Benefit corporation laws in the United States.svg
Map of U.S. states which have passed laws allowing the formation of benefit corporations:

  Passed into law.
  No existing law.
  Bill failed a vote in the state's legislature.

In business, and only in United States corporate law, a benefit corporation (or in some states, a public benefit corporation) is a type of for-profit corporate entity whose goals include making a positive impact on society. Laws concerning conventional corporations typically do not define the "best interest of society", which has led some to believe that increasing shareholder value (profits and/or share price) is the only overarching or compelling interest of a corporation. [1] Benefit corporations explicitly specify that profit is not their only goal. [2] An ordinary corporation may change to a benefit corporation merely by stating in its approved corporate bylaws that it is a benefit corporation. [2]

Contents

A company chooses to become a benefit corporation in order to operate as a traditional for-profit business while simultaneously addressing social, economic, and/or environmental needs. [3] For example, a 2013 study done by MBA students at the University of Maryland showed that one main reason businesses in Maryland had chosen to file as benefit corporations was for community recognition of their values. [4] A benefit corporation's directors and officers operate the business with the same authority and behavior as in a traditional corporation, but are required to consider the impact of their decisions not only on shareholders but also on employees, customers, the community, and the local and global environment. For an example of what additional impacts directors and officers are required to consider, view the Maryland Code § 5-6C-07 – Duties of director. The nature of the business conducted by the corporation does not affect its status as a benefit corporation. Instead, it provides a justification for including public benefits in their missions and activities.

The benefit corporation legislation ensures that a director is required to consider other public benefits in addition to profit, preventing shareholders from using a drop in stock value as evidence for dismissal or a lawsuit against the corporation. Transparency provisions require benefit corporations to publish annual benefit reports of their social and environmental performance using a comprehensive, credible, independent, and transparent third-party standard. However, few of the states have included provisions for the removal of benefit corporation status or fines if the companies fail to publish benefit reports that comply with the state statutes. [5]

Currently, there are no legal standards that define what constitutes a benefit corporation. [6] A benefit corporation need not be certified or audited by the third-party standard. Instead, it may use third-party standards solely as a rubric to measure its own performance. Some authors have pointed out that in the current 36 states that recognize benefit corporations, the laws requiring certification for operation differ from state to state. [7] For example, in the state of Indiana, there is no requirement for certification from a third party needed to operate as a benefit corporation. [8] Other research has indicated a synergy between a benefit corporation and employee ownership. [9]

As a matter of law, in the 36 states that recognize this form of business, a benefit corporation is intended "to merge the traditional for-profit business corporation model with a non-profit model by allowing social entrepreneurs to consider interests beyond those of maximizing shareholder wealth." [2]

History

United States

In April 2010, Maryland became the first U.S. state to pass benefit corporation legislation. [10] As of March 2018, 36 states and Washington, D.C., have passed legislation allowing for the creation of benefit corporations: [7]

StateDate passedDate in effectLegislation
AlabamaDecember 31, 2020January 1, 2021 Act 2020-73, §8. [11]
ArizonaApril 30, 2013December 31, 2014 SB 1238 Archived March 4, 2016, at the Wayback Machine
ArkansasApril 19, 2013July 18, 2013 HB 1510
CaliforniaOctober 9, 2011January 1, 2012 AB 361 for FPCs; revised and renamed as SPCs in 2015 via SB 1301
ColoradoMay 15, 2013April 1, 2014 HB 13-1138
ConnecticutApril 24, 2014October 1, 2014 SB 23, HB 5597 Section 140
DelawareJuly 17, 2013August 1, 2013 SB 47
FloridaJune 20, 2014July 1, 2014 SB 654, HB 685
HawaiiJuly 8, 2011July 8, 2011 SB 298
IdahoApril 2, 2015July 1, 2015 SB 1076
IllinoisAugust 2, 2012January 1, 2013 SB 2897
IndianaApril 30, 2015July 1, 2015 HB 1015
Iowa [12] June 8, 2021June 8, 2021 HB 844
KansasMarch 30, 2017July 1, 2017 HB 2153
KentuckyMarch 7, 2017July 1, 2017 HB 35 Archived June 7, 2017, at the Wayback Machine
LouisianaMay 31, 2012August 1, 2012 HB 1178
MarylandApril 13, 2010October 1, 2010 SB 690/HB 1009
MassachusettsAugust 7, 2012December 1, 2012 2012 Acts, Chapter 238
MinnesotaApril 29, 2014January 1, 2015 SF 2053, HF 2582
MontanaApril 27, 2015October 1, 2015 HB 2458
NebraskaApril 2, 2014July 18, 2014 LB 751
NevadaMay 24, 2013January 1, 2014 AB 89 Archived June 7, 2015, at the Wayback Machine
New HampshireJuly 11, 2014January 1, 2015 SB 215
New JerseyJanuary 10, 2011March 1, 2011 S 2170 Archived September 26, 2015, at the Wayback Machine
New MexicoFebruary 18, 2020February 18, 2020 HB 118, Bill History
New YorkDecember 12, 2011February 10, 2012 A4692-a and S79-a
OregonJune 18, 2013January 1, 2014 HB 2296
PennsylvaniaOctober 12, 2012January 1, 2013 HB 1616
Rhode IslandJuly 17, 2013January 1, 2014 HB 5720
South CarolinaJune 6, 2012June 14, 2012 HB 4766
TennesseeMay 20, 2015January 1, 2016 HB 0767/SB 0972
TexasJune 14, 2017September 1, 2017 HB 3488
UtahApril 1, 2014May 13, 2014 SB 133
VermontMay 19, 2010July 1, 2011 S 263
VirginiaMarch 26, 2011July 1, 2011 HB 2358
Washington January 1, 2022 Wash. Rev. Code § 24.03A.245 [ dubious – discuss ]
Washington, D.C.February 8, 2013May 1, 2013 B 19-058 Archived September 27, 2015, at the Wayback Machine
West VirginiaMarch 31, 2014July 1, 2014 SB 202
WisconsinNovember 27, 2017February 26, 2018 SB298 Act 77

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. [13]

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. [14] [15]

Washington created social purpose corporations in 2012 with a similar focus and intent. [16] [17]

Outside of the United States

Italy

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. [18] [19] [20] [21] [22]

Colombia

In 2018, Colombia introduced benefit corporation legislation. [23]

Canada

In May 2018, the leader of the British Columbia Green Party introduced a bill to amend the Business Corporations Act to permit the incorporation of "benefit companies" in British Columbia. [24] On June 30, 2020, British Columbia became the first province in Canada to offer the option of incorporating as a benefit company. [25] [26] [27]

United Kingdom

In the United Kingdom, Community Interest Companies (CIC) were introduced in 2005, intended "for people wishing to establish businesses which trade with a social purpose..., or to carry on other activities for the benefit of the community". [28]

Differences from traditional corporations

Historically, U.S. 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. [29] 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 Co. in 1919. [30] Over time, through both law and custom, the concept of "shareholder primacy" has come to be widely accepted. This was reaffirmed in 2010 for Delaware corporations 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. [31] This gives directors and officers of mission-driven businesses the legal protection to pursue an additional mission and consider additional stakeholders. [32] [33] 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.

Provisions

Typical major provisions of a benefit corporation are: [34]

Purpose

Accountability

Transparency

Right of action

Change of control/purpose/structure

Benefit corporations are treated like all other corporations for tax purposes. [34]

Benefits

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. [35] 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." [36]

Oregon House Bill 3572, signed by the governor of Oregon in July 2023, [37] allows public contracting agencies to award contracts to benefit corporations if the goods and services are not more than 5% higher than the goods and services available from another company. [38]

Benefit corporation vs. certified benefit corporation

There is a difference between being filing as a benefit corporation in a state, and being a certified benefit corporation also known as a B Corporation. B Corporations voluntarily promise to run their firm with social and environmental causes as a concern. [39] 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. [39] Next, they will have to pass through an audit process. [39] Finally, the firms wishing to remain certified will be required to pay an annual fee to B Lab. [39] Furthermore, companies will pledge to incorporate as a benefit corporation before their re-certification. [39]

Benefit corporations and cooperatives

Benefit corporations are not synonymous with cooperatives, which are a type of corporate governance in which the governance and shares are equally held by their members, such as all employees or all consumers. However, a benefit corporation may also be organized as a cooperative or vice versa.

Taxation

A public benefit corporation is a legal entity that is organized and taxed as either an S corporation or C corporation. [39] 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. [40] 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. [40] 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. [39] If you are currently an LLC, partnership or sole proprietorship then you will have to change tax status. [39] 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.

Possible incentives to change to a benefit corporation

Reorganizing as a public benefit corporation affords a corporation's directors and founders protection from shareholder lawsuits when pursuing decisions that benefit the public at the expense of short-term profits. [39] 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. [39]

Transition process

Changing status to a public benefit corporation requires several steps. First, the firm should choose one or more specific public benefit projects that it will pursue. Next, the articles of incorporation should be amended to state at the beginning that the firm is a public benefit corporation. The term public benefit corporation (PBC) or another abbreviation may be added to the entity's name if the founders choose. Finally the share certificates that are issued by the entity should state that the firm is a public benefit corporation. A shareholder vote is required to amend the articles which must include "non-voting" shares. The vote must gain a two-thirds majority to pass, depending on the Articles of Incorporation. [39] 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 back their shares at fair value before the change. [39] 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 the form of the entity. [39]

The transition process is different state by state but for Colorado it is as follows. First, the firm must prepare the aforementioned amended articles. Then, they also amend their bylaws and assign responsibilities to the board of directors. Next, the amendments must be approved by the directors before going to a shareholder vote. Finally they file the amended articles of incorporation with the secretary of the state. [39]

If the prior entity is an LLC or partnership there is an extra step required. For these entities the articles of incorporation themselves and the related bylaws must first be prepared and filed with the state secretary. Only then will it be possible to merge or transition the previous form into the benefit corporation. [39]

Investor and consumer preferences

According to William Mitchell Law Review journal, about 68 million US customers have a preference for making decisions about their purchases based on a sense of environmental or social responsibility. [41] 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. [41] While others do the opposite, and use their purchasing power to reward firms that they believe are doing social or environmental good. [41] 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." [41] 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. [41]

See also

Related Research Articles

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A board of directors is an executive committee that supervises the activities of a business, a nonprofit organization, or a government agency.

<span class="mw-page-title-main">Corporation</span> Legal entity incorporated through a legislative or registration process

A corporation is an organization—usually a group of people or a company—authorized by the state to act as a single entity and recognized as such in law for certain purposes. Early incorporated entities were established by charter. Most jurisdictions now allow the creation of new corporations through registration. Corporations come in many different types but are usually divided by the law of the jurisdiction where they are chartered based on two aspects: whether they can issue stock, or whether they are formed to make a profit. Depending on the number of owners, a corporation can be classified as aggregate or sole.

Business is the practice of making one's living or making money by producing or buying and selling products. It is also "any activity or enterprise entered into for profit."

A nonprofit organization (NPO), also known as a nonbusiness entity, nonprofit institution, or simply a nonprofit, is a legal entity organized and operated for a collective, public or social benefit, as opposed to an entity that operates as a business aiming to generate a profit for its owners. A nonprofit organization is subject to the non-distribution constraint: any revenues that exceed expenses must be committed to the organization's purpose, not taken by private parties. Depending on the local laws, charities are regularly organized as non-profits. A host of organizations may be nonprofit, including some political organizations, schools, hospitals, business associations, churches, foundations, social clubs, and consumer cooperatives. Nonprofit entities may seek approval from governments to be tax-exempt, and some may also qualify to receive tax-deductible contributions, but an entity may incorporate as a nonprofit entity without having tax-exempt status.

Corporate governance refers to the mechanisms, processes, practices, and relations by which corporations are controlled and operated by their boards of directors, managers, shareholders, and stakeholders.

<span class="mw-page-title-main">Limited liability company</span> US form of a private limited company

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<span class="mw-page-title-main">Joint-stock company</span> Business entity owned by shareholders

A joint-stock company (JSC) is a business entity in which shares of the company's stock can be bought and sold by shareholders. Each shareholder owns company stock in proportion, evidenced by their shares. Shareholders are able to transfer their shares to others without any effects to the continued existence of the company.

<span class="mw-page-title-main">Incorporation (business)</span> Legal process to create a new corporation

Incorporation is the formation of a new corporation. The corporation may be a business, a nonprofit organization, sports club, or a local government of a new city or town.

<span class="mw-page-title-main">Private limited company</span> Type of company used in many jurisdictions

A private limited company is any type of business entity in "private" ownership used in many jurisdictions, in contrast to a publicly listed company, with some differences from country to country. Examples include the LLC in the United States, private company limited by shares in the United Kingdom, GmbH in Germany and Austria, Besloten vennootschap (BV) in The Netherlands and Belgium, société à responsabilité limitée (SARL) in France, and sociedad de responsabilidad limitada (SRL) in the Spanish-speaking world. The benefit of having a private limited company is that there is limited liability.

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Dodge v. Ford Motor Co., 204 Mich 459; 170 NW 668 (1919), is a case in which the Michigan Supreme Court held that Henry Ford had to operate the Ford Motor Company in the interests of its shareholders, rather than in a manner for the benefit of his employees or customers. It is often taught as affirming the principle of "shareholder primacy" in corporate America, although that teaching has received some criticism. At the same time, the case affirmed the business judgment rule, leaving Ford an extremely wide latitude about how to run the company.

A for-profit corporation is an organization which aims to earn profit through its operations and is concerned with its own interests, rather than the interests of the public.

<span class="mw-page-title-main">Low-profit limited liability company</span> Legal form of business entity in the US

A low-profit limited liability company (L3C) is a legal form of business entity in the United States. Commonly referred to as a hybrid structure, it has characteristics of both for-profit and non-profit entities. L3Cs were created to comply with the Internal Revenue Service (IRS) program-related investments (PRIs) rules which allow most typically private foundations the ability to maintain tax-exempt status through investments in qualifying businesses and/or charities. With a social mission as the primary objective and a secondary objective of profit generation, the L3C legal form is considered a viable option for businesses seeking a reputation or marketability for being a social enterprise.

A charitable for-profit entity is an organization with a charitable mission but legally organized as a for-profit corporation. Both benefit corporations and Low-profit limited liability companies (L3C) fall under this category. As well as generating a profit, a charitable for-profit entity concentrates on setting a social objective. The business must achieve its social purpose, as well as make a profit, to be successful. There are movements to refine strategies, retuning community-oriented activities based on ROI of Little Investment or Small Capital, Low Risk, yet, higher return and rebranding nonprofit entities from wholly-dependable funding beneficiary from Governments or public i.e. business organization or individual. previously, we often heard of Nonprofits and community-based organizations, now, For-profits community-based Social Enterprises The case of organizing charitable work under for-profit rules rather than as a traditional charity such as a foundation gained prominence when Google announced its Google.org branch in 2006. Since then, the subject has been under both academic and public debate with U.S. law professor Eric Posner arguing in favor of expanding Charity law to include for-profit charities, while Brian Galle considered the legislative popularity of social enterprises a "race to the bottom among states competing to siphon away federal tax dollars for local businesses."

<span class="mw-page-title-main">B Corporation (certification)</span> Social and environmental certification of for-profit companies

In business, a B Corporation is a for-profit corporation certified for its social impact by B Lab, a global non-profit organization. To be granted and to maintain certification, companies must receive a minimum score of 80 from an assessment of its social and environmental performance, integrate B Corp commitments to stakeholders into company governing documents, and pay an annual fee based on annual sales. Companies must re-certify every three years to retain B Corporation status.

<span class="mw-page-title-main">Social purpose corporation</span> For-profit that enables, without requiring, social or environmental decision making

A social purpose corporation (SPC) is a type of for-profit entity, a corporation, in some U.S. states that enables, but does not require, considering social or environmental issues in decision making. SPCs are similar to benefit corporations.

References

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  2. 1 2 3 Lee, Jaime (May 2018). "Benefit Corporations: A Proposal for Assessing Liability in Benefit Enforcement Proceedings". Cornell Law Review . 103 (4): 1075–1100. ISSN   0010-8847.
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  11. ↑ "2023 Code of Alabama :: Title 10A - Alabama Business and Nonprofit Entities Code. :: Chapter 2A - Alabama Business Corporation Law. :: Article 17 - Benefit Corporations. :: Section 10A-2A-17.01 - Application of Article 17; Definitions". Justia Law. Retrieved May 24, 2024.
  12. ↑ "Benefit Corporations vs Public Benefit Corporations in Iowa" Surge Business Law. "an Iowa 'benefit corporation' may have both a profit and public benefit motive while an Iowa 'public benefit corporation' is a charitable non-profit organization."
  13. ↑ Stuart, Christine (October 1, 2014). "20 Connecticut Social Entrepreneurs Convert Their Companies to Benefit Corporations". CT News Junkie. Retrieved July 17, 2017.
  14. ↑ S.B. 2358, 98th Gen. Assem. (Ill. 2013).
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  18. ↑ Italian financial Act for 2016– L. nr. 208/2015
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  22. ↑ "What are benefit corporations, the companies doing good for society – LifeGate". LifeGate (in Italian). July 1, 2017. Retrieved October 19, 2018.
  23. ↑ "The Dark Side of Colombia's Benefit Corporation". Oxford Law Faculty. June 8, 2022. Retrieved August 2, 2022.
  24. ↑ McKeen, Alex (May 2, 2018). "Provincial Green Party eyes making B.C. the first Canadian jurisdiction to recognize 'benefit corporations' | The Star". Toronto Star. Retrieved September 11, 2019.
  25. ↑ "Benefit Company BC".
  26. ↑ "Benefit companies in British Columbia | DLA Piper".
  27. ↑ "Full Multi - Business Corporations Act".
  28. ↑ Regulator of Community Interest Companies (2016). Office of the Regulator of Community Interest Companies: Information and guidance notes. Chapter 1: Introduction (PDF). Department for Business, Energy & Industrial Strategy. p. 8.
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  34. 1 2 "Maryland First State in Union to Pass Benefit Corporation Legislation". CSRWire USA. April 14, 2010.
  35. ↑ New-Economy Movement Archived August 7, 2011, at the Wayback Machine article by Gar Alperovitz, also appeared in the June 13, 2011, edition of The Nation
  36. ↑ "Benefit Corporation Update: Patagonia Passes B Impact Assessment, Improves Score to 116 - Patagonia". www.patagonia.com. October 24, 2014.
  37. ↑ "HB 3572 Enrolled". Oregon State Legislature. Retrieved December 26, 2023.
  38. ↑ Krizanac, Antonija (November 14, 2023). "Building in 2024: Recent Oregon Legislative Changes Impacting the Construction Industry". Davis Wright Tremaine LLP. Retrieved December 26, 2023.
  39. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 The Alliance Center. "What Is the Difference between a Certified B Corporation and a Public Benefit Corporation (PBC)?" The Alliance Center Organization, http://www.thealliancecenter.org/wp-content/uploads/2019/11/Benefit-Corporation-101-Reduced.pdf.
  40. 1 2 "S Corporations | Internal Revenue Service". www.irs.gov. Retrieved December 18, 2020.
  41. 1 2 3 4 5 Babson, William H. Clark Jr. & Elizabeth K. "How Benefit Corporations Are Redefining the Purpose of Business Corporations." William Mitchell Law Review (2012): 818-842.
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