Benefit Corporations

To B or Not to B

Making an appearance in 2010, benefit corporations are a fairly new type of business entity. Currently recognized in thirty-four states, as well as D.C. and Puerto Rico, benefit corporations pursue a mission that goes beyond that of the traditional corporation of solely making money for the shareholders. A benefit corporation’s leadership is required to achieve a public purpose while balancing shareholder interests with those of the employees, community, and environment.

In the jurisdictions that recognize such entities, a benefit corporation is formed by filing traditional articles of incorporation that include a statement that the corporation is formed to provide for a general public benefit. With shareholder approval, an existing corporation can change to a benefit corporation by filing amended or restated articles of incorporation. In jurisdictions that have not passed legislation, corporations have the option of domesticating or forming a new benefit corporation altogether.

A benefit corporation must be formed for the purpose of creating a general public benefit. Most jurisdictions define general public benefit as one having a material, positive impact on the environment or society. A few jurisdictions require a more specific public benefit, while some permit a combination with the addition of one or more specific benefits. Each jurisdiction defines or gives examples of permissible specific public benefits in its statute.

Subject to the same legal requirements as other for-profit entities, benefit corporations additionally have to voluntarily and formally meet higher standards of corporate purpose, accountability, and transparency. One such transparency provision requires benefit corporations to publish annual benefit reports of their social and environmental performance as assessed by an independent, third-party standard. Legislation does not specify a particular standard, but guidelines provide that the standard be comprehensive, credible, transparent, and developed by an independent entity that has no material or financial interest in the use of the standard. Some jurisdictions have dropped the third-party standard requirement entirely. Currently there are several companies available to perform these third-party standard assessments, including some that cater to benefit corporations only.

In addition to the requirement that the annual benefit report be posted on the company’s website, some jurisdictions require the annual benefit report be filed along with the regular annual report at the Secretary of State. This extra filing requirement often includes a fee. When the additional filing is required, noncompliance ranges from no penalty whatsoever to loss of status as a benefit corporation.

Benefit corporations are often referred to as “B Corps.” However, note the difference between a benefit corporation and a Certified B Corp. The benefit corporation is a business entity created under state law, similar to a traditional corporation. A Certified B Corp is a business of any type that has been certified by B Lab, a non-profit organization. A business does not need to acquire a B Lab certification to form or convert to a benefit corporation.

Continuing to gain momentum, with legislation introduced in another six states, a benefit corporation can provide a safe harbor for directors to pursue social and environmental benefits over profit. Additionally, they allow for the duration and protection of company values through unforeseen leadership change or acquisition. However, because not all jurisdictions recognize benefit corporations, and because of the varied laws of those that do, there is still much unchartered legal territory.

The jurisdictions that currently recognize benefit corporations or a similar type of social purpose corporation are: AR, AZ, CA, CO, CT, DC, DE, FL, HI, ID, IL, IN, KS, KY, LA, MA, MD, MN, MT, NE, NH, NJ, NV, NY, OR, PA, PR, RI, SC, TX, UT, VA, VT, WA, WI, and WV.