Benefit corporation


In the United States, a benefit corporation is a type of for-profit corporate entity, authorized by 35 U.S. states and the District of Columbia that includes positive impact on society, workers, the community and the environment in addition to profit as its legally defined goals, in that the definition of "best interest of the corporation" is specified to include those impacts. Traditional C Corporation law does not specify the definition of "best interest of the corporation" which has led to profit motivations being used as the main driver for best interests. Benefit corporations may not differ much from traditional C corporations. A C corporation may change to a B corporation merely by stating in its approved corporate bylaws that it is a benefit corporation; however in certain jurisdictions, the terms "public benefit corporation" or "PBC" are also required to be in the legal name of B corporations.
A business may choose to file as a benefit corporation instead of a traditional C corporation for many reasons; 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. 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 local and global environment. For an example of what additional impacts directors and officers are required to consider, view the . The nature of the business conducted by the corporation does not affect their status as a benefit corporation, instead providing them protection for including public benefits in their missions and activities.
An issue in deciding whether or not to become a benefit corporation is dependent on a company who wants to make a profit while simultaneously addressing social, economical, and environmental needs, or to operate as a traditional for-profit business corporation model. Both have their own benefits and costs.
Shareholders typically judge a company's well-being on its long term financial success, in addition to public perception and quality of product, but in recent decades quarterly trading reporting has led to hyper-focus on short-term gains. As such, the perception that corporate directors are legally bound to maximize shareholder value has grown, although it is not true. 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 removal of benefit corporation status if they fail to do so, or if those reports show below-expected ratings.
There are around 12 third-party standards that satisfy the reporting requirements of most benefit corporation statutes. 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. In this case, some authors have examined and pointed out that in the current 36 states who recognize benefit corporations as legal business forms the law regarding the requirement of certifications for operation differs from state to state. For example, in the state of Indiana, there is no requirement of certifications from a third party needed in order to operate as a benefit corporation. It has also been suggested that other organizations that choose to operate under the business formation of a benefit corporation may also want to engage in receiving a B Corp certification from a third party, such as B Lab.
As a matter of law, in the 36 states who recognize this type of business form, a benefit corporation is used “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.”

History

In April 2010, Maryland became the first U.S. state to pass benefit corporation legislation. As of March 2018, 35 states and Washington, D.C. have passed legislation allowing for the creation of benefit corporations:
StateDate PassedDate in EffectLegislation
ArizonaApril 30, 2013December 31, 2014
ArkansasApril 19, 2013July 18, 2013
CaliforniaOctober 9, 2011January 1, 2012
ColoradoMay 15, 2013April 1, 2014
ConnecticutApril 24, 2014October 1, 2014,
DelawareJuly 17, 2013August 1, 2013
FloridaJune 20, 2014July 1, 2014,
HawaiiJuly 8, 2011July 8, 2011
IdahoApril 2, 2015July 1, 2015
IllinoisAugust 2, 2012January 1, 2013
IndianaApril 30, 2015July 1, 2015
KansasMarch 30, 2017July 1, 2017
KentuckyMarch 7, 2017July 1, 2017
LouisianaMay 31, 2012August 1, 2012
MarylandApril 13, 2010October 1, 2010
MassachusettsAugust 7, 2012December 1, 2012
MinnesotaApril 29, 2014January 1, 2015,
MontanaApril 27, 2015October 1, 2015
NebraskaApril 2, 2014July 18, 2014
NevadaMay 24, 2013January 1, 2014
New HampshireJuly 11, 2014January 1, 2015
New JerseyJanuary 10, 2011March 1, 2011
New YorkDecember 12, 2011February 10, 2012
OregonJune 18, 2013January 1, 2014
PennsylvaniaOctober 12, 2012January 1, 2013
Rhode IslandJuly 17, 2013January 1, 2014
South CarolinaJune 6, 2012June 14, 2012
TennesseeMay 20, 2015January 1, 2016
TexasJune 14, 2017September 1, 2017
UtahApril 1, 2014May 13, 2014
VermontMay 19, 2010July 1, 2011
VirginiaMarch 26, 2011July 1, 2011
Washington, D.C.February 8, 2013May 1, 2013
West VirginiaMarch 31, 2014July 1, 2014
WisconsinNovember 27, 2017February 26, 2018

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.
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.
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.
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.
Washington created social purpose corporations in 2012 with a similar focus and intent.

Differences from traditional corporations

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. 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. 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, 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. If a company does change ownership and the result is no longer in adherence to its initially described benefit goals, the sale could be challenged in court.
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.
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. This gives directors and officers of mission-driven businesses the legal protection to pursue an additional mission and consider additional stakeholders. 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:
Purpose
Accountability
Transparency
Right of Action
Change of Control/Purpose/Structure
Benefit corporations are treated like all other corporations for tax purposes.

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. 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.”