Until recently, there were two types of corporations: "for-profit" and "not-for-profit." Now there is a new kid on the entity block: the benefit corporation. For-profit corporations (as the name implies) operate to make money for the shareholders. And, not-for-profit, or non-profit, corporations operate to benefit society. The distinction between the two is absolute. In fact, a non-profit can lose its tax-exempt status if there is any benefit to a private individual. And, for-profit corporations have to tread very 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, this chasm becomes increasingly troublesome. More and more business owners want to be able to make money, but they want to do so in a socially responsible way and benefit the world around them. Enter the “benefit corporation.” The "benefit corporation," sometimes dubbed a "b corp," was born in 2010 when Maryland passed a law authorizing the hybrid entity.
As of January 1, 2016, 30 other states have followed Maryland’s lead—and several more have legislation pending. The benefit corporation movement reached its tipping point when Delaware (the bell-weather for all things corporate) enacted its own benefit corporation law, effective on August 1, 2013. Delaware's embrace of the benefit corporation indicates it is here to stay and will loom larger in the United States business landscape.
If you are a socially minded entrepreneur, what should you know?
First, a benefit corporation is a corporation. This means that it is incorporated just like any other corporation. And, it must appoint and continuously maintain a registered agent in its formation state, and any states where it is registered to do business. (An existing corporation can become a benefit corporation by obtaining shareholder approval and filing restatement or amendment documents with the state.)
One point worth noting is that a benefit corporation is taxed as a C corporation by default. There are none of the tax benefits enjoyed by a traditional non-profit corporation. However, 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.
Another point worth noting is that a benefit corporation is a distinct state-law entity. A "B Corporation" is an entity that has been certified by the non-profit organization B Lab as meeting a number of standards of social responsibility. As noted below, being a certified B Corporation can be very helpful, but it is not essential to operate as a benefit corporation.
Although it is formed as a for-profit corporation, there are three major differences between benefit corporations and traditional ones:
- corporate purpose,
- directors' duties
- annual reporting obligations
Although the exact requirements vary from state to state, the articles of incorporation must specifically state that the corporation’s purpose is "to create a general public benefit." Some states also allow (or require) a corporation to claim a specific public benefit, such as providing services to a low-income community.
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. But they also have a duty to the employees, the customers, the groups the corporation intends to benefit, and the general public.
To make sure that the benefit purposes are carried out, and not just empty words on a document, annual reporting obligations are also more extensive. Rather than merely updating corporation information, a benefit corporation also must prepare a report on how it is doing in achieving its stated purpose. Although, like everything else in business entity law, state requirements for the contents of the report and the publication of the report vary, it must require that the activities of the corporation be evaluated against a third-party standard. For this reason, many benefit corporations will obtain certification from the non-profit organization B Lab. While B Lab certification is not required to be a benefit corporation, obtaining it lightens the annual reporting burden and provides a readily recognizable “seal of approval” for investors and business partners.
The benefit corporation provides new and exciting opportunities to improve the world while still benefitting the shareholders.