The benefit corporation is a relatively new corporate form structured to serve a beneficial public purpose while pursuing profit. Unlike traditional corporations that focus only on shareholder profit, benefit corporations must balance financial returns with their stated social mission.
Key takeaways:
- Benefit corporations are for‑profit entities legally required to pursue a general public benefit while still generating profit for shareholders.
- They differ from traditional corporations through expanded director duties and enhanced annual reporting to demonstrate progress toward their stated public benefit purpose.
Referred to as a “public benefit corporation” in some states, the benefit corporation was born in 2010 when Maryland passed a law authorizing the hybrid entity. The benefit corporation movement reached its tipping point when Delaware enacted its own benefit corporation law, effective on August 1, 2013.
How a benefit corporation differs from a C corporation
A benefit corporation has a similar formation process and requirements to those of a standard corporation (i.e., a C corporation). It is incorporated through a state filing and must appoint and continuously maintain a registered agent in its formation state, as well as in any states where it is registered to do business.
Although a benefit corporation is a for-profit business entity, there are three major differences between benefit corporations and traditional corporations:
- Corporate purpose: A benefit corporation must have the purpose of creating a general public benefit. Most states define this as having a material, positive impact on society or the environment.
- Directors' duties: While directors and officers of a traditional corporation must focus primarily on maximizing value for shareholders, directors and officers of a benefit corporation are expressly permitted to consider the social and environmental impacts of their decisions. In some states, these duties are mandatory. States may also require the appointment of a “Benefit Director” who is responsible for ensuring the corporation meets its stated public purpose.
- Annual reporting obligations: Most states require benefit corporations to file an annual benefit report assessing the company’s performance regarding its public benefit purpose(s), often using a recognized third-party standard.
Benefit corporations vs. nonprofit corporations
The main difference between a benefit corporation and a nonprofit corporation is the ability to distribute profits. Benefit corporations can operate to make money for the shareholders and are treated as for-profit business entities for state and federal tax purposes.
Nonprofit corporations operate to benefit society rather than private owners. While nonprofits can generate revenue and pay reasonable compensation to individuals providing services, they cannot distribute net earnings to private individuals. Nonprofits may also qualify for federal and state tax exemptions if they meet certain requirements, but they can lose their tax-exempt status if they provide improper benefits to private individuals.
The main reason behind the creation of benefit corporations is that traditional for-profit corporations must tread carefully when undertaking socially responsible ventures, lest they open themselves up to charges that they are breaching their fiduciary duties to the corporation and its shareholders. As social responsibility becomes increasingly important, benefit corporations allow businesses to pursue profits while operating in a socially responsible way and benefiting the world around them.
What is a certified B Corporation?
It is important to note the difference between a statutory benefit corporation and a certified B Corporation (B Corp).
A statutory benefit corporation is a legal entity type created under state law. A certified B Corp is a business that has been certified as meeting specific standards of social and environmental responsibility by the non-profit organization B Lab. Unlike benefit corporation status, B Corp certification is not limited to corporations. For example, LLCs and partnerships can obtain B Corp certification.
Benefit corporations are not required to be B-Corp certified. However, many benefit corporations choose to obtain certification from B Lab because many states require benefit corporations to assess their performance using a third-party standard. B Lab certification fulfills this requirement and provides a readily recognizable "seal of approval" for investors and business partners.
How are B corporations taxed?
Benefit corporations are taxed as a C corporation by default. They are not able to enjoy the tax benefits of a nonprofit.
If the shareholder and stock requirements are met, a benefit corporation can make an S corporation election and take advantage of the tax planning options available to S corps.
Benefit corporation requirements
Although exact requirements vary from state to state, many benefit corporation requirements mirror those of a standard corporation. They must obtain a registered agent, file articles of incorporation with the state, complete registration and licensing requirements, and fulfill corporate duties such as electing a board of directors and adopting bylaws.
The articles of incorporation of a benefit corporation must specifically state that its purpose is "to create a general public benefit". Some states also allow (or require) a benefit corporation to identify a specific public benefit, such as providing services to a low-income community.
An existing corporation can become a benefit corporation by obtaining shareholder approval and filing amendment documents with the state.
As noted earlier, in a traditional corporation, the directors have a duty only to the shareholders. In a benefit corporation, the directors still have a duty to the shareholders as well as to the employees, the customers, the groups the corporation intends to benefit, and the general public.
To ensure that benefit purposes are not just empty words on a document, annual reporting obligations are also more extensive than with a standard corporation. A benefit corporation must prepare a report on its progress toward achieving its stated purpose. While state requirements for the report's contents and publication vary, many states require that corporate activities be evaluated against a third-party standard.
