Choosing an incorporation state
One of the first and most important decisions a business owner will make is choosing a form of business entity. And increasingly, when the business will have a social or environmental mission that choice is a benefit corporation.
Most states have enacted benefit corporation laws. The benefit corporation’s owners can choose any of those states as its state of incorporation. However, in most cases the choice comes down to two states – to incorporate in the state where the business is located or incorporate in Delaware.
Most of the states that have benefit corporation laws have based their law on the Model Benefit Corporation Act – a model act drafted by a non-profit organization called B-Lab. Delaware’s Public Benefit Corporation Act is not based on the Model Act. Therefore, anyone deciding between Delaware and a Model Act state needs to understand the differences between the two approaches.
Delaware vs. model act
Among the main differences between Delaware’s benefit corporation law and the Model Act are the following:
- Specific benefit requirement – Delaware requires a public benefit corporation (PBC) to have as a purpose the promotion of a specific public benefit, which must be set forth in its certificate of incorporation. The Model Act requires a benefit corporation to have as a purpose the creation of a general public benefit. It may, but is not required to, set forth a specific beneficial purpose in its articles of incorporation.
- Third party standard – The Model Act requires a benefit corporation’s social and environmental performance to be defined, reported, and assessed against a third party standard. That standard must be developed by an independent organization and must be credible and transparent. Delaware does not require a PBC’s performance to be measured against a third party standard.
- Benefit directors and officers – The Model Act requires publicly traded benefit corporations, and allows privately held benefit corporations, to appoint a benefit director. A benefit director is required to prepare a statement of his or her opinion as to whether the corporation has been successful in pursuing its beneficial purposes. It also permits the appointment of a benefit officer, whose duties will include the preparation of the annual benefit report. Delaware’s law does not create the positions of benefit director or officer.
- Director decision-making – Delaware requires a PBC’s directors to balance three factors – the pecuniary interests of stockholders, the best interests of those materially affected by the corporation’s conduct, and the specific public interest identified in its certificate of incorporation. The Model Act requires directors to consider the effects of any action or inaction upon seven groups or interests - shareholders, employees, customers, community and societal factors, local and global environment, the corporation’s long and short term interests, and the ability of the corporation to accomplish its beneficial purposes.
- Enforcement actions – The Model Act creates a new right of action called a benefit enforcement proceeding. No person may bring a claim against a benefit corporation or its directors or officers except through a benefit enforcement proceeding. Delaware does not create a special enforcement action for PBCs. Instead a shareholder can bring a derivative suit under the general provision applicable to all Delaware corporations.
- Information reporting – The Model Act requires benefit corporations to prepare an annual benefit report, deliver it to its shareholders, and make it available to the public. Delaware requires a biennial report and does not require it to be made public, although the corporation may require an annual report and may make it available to the public if it so chooses.
These are some of the differences between Delaware’s approach to social enterprise law and the approach taken by the states adopting the Model Benefit Corporation Act. Keep in mind that there are also states that follow neither Delaware nor the Model Act. Therefore anyone planning on forming a benefit corporation should make sure that they, or their legal advisors, are familiar with the various approaches so that the choice of a state of incorporation is the best for their situation.
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