Introduction to benefit corporations
You’re an aspiring entrepreneur with a passion for some cause, and you’re trying to figure out how to join those two distinct and seemingly disparate worlds.
When a prospective client like you walks into my office, he or she almost universally ends the narrative with “…and so I need to form a nonprofit.” In discussing that point, I ask if the individual is comfortable funneling all profits back in toward supporting the organization’s cause instead of pulling them out of the company. That’s where the conversation usually stalls a bit and I will hear something along the lines of “Well, I’m really committed to this cause, but I still want to be able to have a growing business that will help finance my retirement.” Therein lies the problem.
Is there actually a way that the ideas of profit and social good can coexist? Yes, at the nexus of those ideals is a new form of entity known as a benefit corporation.[1] A benefit corporation is a traditional, for-profit corporation with a twist: it has a commitment to sustainability or a more specific issue or cause embedded in its DNA.
A benefit corporation is a great way to combine an entrepreneur’s desire to create a growing and profitable business with a commitment to some social good. In fact, some of the most recognizable brands in the world have chosen to become benefit corporations: Patagonia, Etsy, Warby Parker, and Ben & Jerry’s, just to name a few.
What makes a benefit corporation attractive?
You might be wondering why a company would choose to form as a benefit corporation instead of just using the traditional C-corporation structure and crafting a mission statement around the cause the company wanted to further. There are actually a few reasons. First, corporate law generally requires directors to place profit above all else. If the directors of a traditional C-corporation make a decision that accomplishes some social good to the detriment of the company’s profits (e.g., paying more for environmentally-sustainable materials), stockholders could view that action as a breach of the directors’ fiduciary duties to maximize profits and could potentially even launch a suit against the company. Directors of a benefit corporation, by contrast, are directed to take social and environmental impact into account when considering actions, insulating them from those potential liabilities.[2]
Another reason an entrepreneur might find the benefit corporation structure attractive is to ensure that the social impact mission remains even if the company is later sold. As we’ll discuss later, it is relatively difficult for a benefit corporation to remove the designation once it is in place. Lastly, there just is not an alternative to the benefit corporation. Nothing in any corporate statute commits companies to operate in a sustainable or socially-conscious manner, so an entrepreneur or founder team can use benefit corporation status as a way to hold themselves accountable for making responsible decisions.
In addition to reduced director liability, stockholders have expanded rights to hold the company accountable to the mission or impact statement set forth in its formation documents. It’s important to note, however, that these rights extend only to stockholders. For example, stockholders in a benefit corporation with the express mission of conservation might be able to bring a claim against the company for failing to consider conservation in its activities; however, the Sierra Club, a nonprofit organized for the purpose of protecting and promoting responsible use of the environment, would not be able to assert the same claims.
Benefit corporations may also find that their status gives them advantages in the marketplace. Not only can benefit corporation status be used as a marketing tool to show that a company has backed up social consciousness with action, potential employees—particularly millennials—may be drawn to companies that reflect the values they hold dear as individuals. Lastly, benefit corporations might have greater access to private capital than equivalent C-corporations, as value funds or other investors focused on social impact choose to invest in companies with a long-term, demonstrable interest in good corporate citizenry.
Formation and governance
Once I describe the advantages of a benefit corporation to a potential client, the discussion usually shifts to the technical formalities surrounding formation. It’s important to note that benefit corporations are not authorized in all states. No need to worry if your state isn’t one of them, though: you can still incorporate in a jurisdiction that permits benefit corporations and qualify to do business in your state (albeit that qualification would be as a traditional corporation).
It’s easy to form a benefit corporation. You file either articles or a certificate of incorporation with the requisite office (usually the Secretary of State) in the state of incorporation. The certificate or articles must state that the corporation is a benefit corporation and may also identify a specific public benefit (e.g., “improve education among the public relating to child development”).
The identification of a specific public benefit in the incorporation documents is really at the core of embedding the mission into the company for the long-term. Why? Although you can amend the articles of incorporation just like you can with a C-corporation (e.g., with a majority stockholder vote), it takes a specific statutory threshold to change provisions relating to public benefit. Nebraska, for example, requires a two-thirds vote of each class of stock, voting separately, to remove a public benefit provision from a company’s articles of incorporation, irrespective of what other voting rights each class has.[3] So if you have a nonvoting class of stock, those stockholders still actually do have a vote when it comes to removing the benefit provision.
Depending on your jurisdiction, you may also be required/permitted to appoint an independent benefit director to gauge and report progress you have made on your impact goals. In addition, you can also appoint a benefit officer to assist with any reporting obligations.
Where to form the benefit corporation?
When deciding where to domicile your benefit corporation, the ongoing compliance and reporting costs are likely to be a major concern for you. Most of my clients want to maintain the most flexible and lowest-cost benefit corporation structure; however, there are a few for which additional reporting obligations are not a concern, as they view the additional transparency as part of the social contract with their stakeholders. In determining which jurisdiction might be best for your corporation, let’s analyze the differences between two states: Nebraska—where I’m located—and Delaware—where most of my clients ultimately choose to form their benefit corporations.[4],[5]
The heart of the benefit corporation lies in the requirement that the corporation publish periodic reports indicating how its actions have advanced general public benefit and the specific benefit outlined in the company’s incorporation documents. Although both Delaware and Nebraska require reports to be prepared, there are substantial differences in the level of detail each state requires. A Nebraska corporation must select a third-party standard to assess the company’s performance in furthering public benefit and must also include an assessment of social impact against that standard in a report. Delaware corporations may, but are not required to, use third party standards in assessing performance.
The level of transparency and accessibility of benefit reports varies dramatically between Delaware and Nebraska as well. Nebraska benefit corporations must prepare their report annually, while Delaware companies are only required to publish a report biennially. In addition, a Nebraska corporation must file the report with the Secretary of State and either publish it on the company website or provide it free of charge to any person that requests a copy of the report. Delaware, by contrast, does not require that the report be filed with any state agency and provides that only stockholders have a right to receive the document.
Closing thoughts
A benefit corporation might be for you if you are committed to positive social or environmental impact and you want service and conscientiousness embedded into your company’s DNA. If instead you want to run a profitable business and simply donate to a charitable organization, perhaps a traditional C-corporation is better for you. And if your biggest focus point is not creating a business but rather assisting a particular cause, your best bet might be to explore the nonprofit route.
Once you decide that a benefit corporation is right for you, you’ll want to decide what specific benefits will be at the heart of your mission. Existing C-corporations will want to make sure that (a) benefit corporations are permitted in their jurisdiction of incorporation and (b) they have sufficient stockholder approval (generally 2/3) to make the transition to a benefit corporation. New ventures should consider where to form the benefit corporation: if reduced reporting obligations are important to you, you might pick a state like Delaware for your incorporation. If, on the other hand, you do not mind additional transparency and reporting, you might select another state, such as Nebraska. In any event, a lawyer experienced in this area can walk you through the decision-making process and help you select a form of entity and jurisdiction that’s right for you.
[1] Being structured as a benefit corporation is different than achieving “B Corp” status from an organization such as B Lab. B Corp certification may be available to companies incorporated in states that do not recognize benefit corporations (i.e. C-corporations), but certification involves a more expensive and time-consuming process than simply adopting the legal status of a benefit corporation.
[2] It is important to note that although benefit corporation directors are free to consider impact in addition to profit maximization, they are not free to completely disregard profits and do still owe fiduciary duties to stockholders.
[3] Neb. Rev. Stat. §§ 21-403(8); 21-406.
[4] The Nebraska Benefit Corporation Act is codified at Neb. Rev. Stat. §§ 21-402 et seq, and the corresponding Delaware law is codified at Del. Code Ann. 8 Del. §§ 361 et seq.
[5] Note that incorporating in a state other than one where your company has a physical presence will incur additional expense, as your firm will need to register as a foreign corporation with your home state.