You may have heard recently that Kickstarter, the online crowdfunding company, announced that it was reincorporating as a public benefit corporation in Delaware. While it is not the first company to become a public benefit corporation, it is one of the more better-known to do so. Other notable companies that are benefit or public benefit corporations include sportswear company Patagonia and eyewear company Warby Parker.
Kickstarter’s co-founders stated in the announcement that re-incorporation as a public benefit corporation would ensure that money -- or the promise of it -- would not corrupt their company’s mission of enabling creative projects to be funded. Patagonia donates at least 1 percent of sales to environmental groups working to reverse Earth’s declining environmental health. Warby Parker donates the equivalent of the cost of the number of eyeglasses sold each month to nonprofits helping to provide eyeglasses in developing countries.
1. What are benefit or public benefit corporations?
Benefit corporations, or public benefit corporations, are the latest variation on the corporate entity. When I started my law career about 20 years ago, LLCs, or limited liability companies, were the newest option in entity choices and are now commonplace. As LLCs are essentially a hybrid between a corporation and a partnership, a benefit corporation or public benefit corporation is essentially a hybrid between a for-profit corporation and a not-for-profit corporation -- although with very different combinations and results. An LLC combines the limited liability of a corporation with the tax benefits of a partnership, while the benefit corporation combines the public benefit of a not-for-profit corporation with the ability of for-profit corporations to earn profits.
2. What are key features of a benefit or public benefit corporation?
A benefit corporation allows the entity, and therefore its officers and directors, to pursue social benefits in addition to the traditional aim of maximizing shareholder profits. Unlike not-for-profit corporations, whose main goals are charitable, benefit corporations’ goals are to earn profits, as well as provide some public benefit. Benefit corporations are said to pursue a “triple bottom line, focusing on people, the planet and profits,” meaning that benefit corporations value their social and environmental benefits in addition to their financial health. Traditionally, corporate officers and directors are tasked with maximizing shareholder revenue to the exclusion of all else. Boards of benefit corporations are allowed and in some states are even required to consider public benefits and other factors, and they may be protected from shareholder suits if such benefits impair the shareholders’ bottom line.
3. What are the requirements in different states?
Benefit corporations, like corporations and LLCs, are creatures of statute, and each state that allows them has specific requirements. Currently, approximately 30 U.S. states and the District of Columbia have authorized benefit corporations, with Maryland being the first in 2010. Delaware, the “corporation capital,” adopted its benefit corporation statute in 2013. In six states, benefit corporations will have become effective in 2015 or 2016, and other states are currently in the process of authorizing benefit corporations.
A couple of major distinctions exist between the various states’ authorizing statutes, but most are very similar. One distinction is whether the benefit corporation must meet external standards to measure its performance, such as in Illinois and the District of Columbia, or set its own standards, such as in Delaware. Another distinction is whether the benefit corporation’s purpose is to promote general benefits, such as a material positive impact on society and the environment, or a specific benefit -- for example, addressing the needs of low-income or underserved communities, promoting economic opportunity or preserving the environment.
4. What are B corporations?
B Lab, an independent not-for-profit corporation headquartered in Pennsylvania, is the primary third-party certifier of benefit corporations, and it claims to have certified more than 1,000 benefit corporations from more than 30 countries and 60 industries. This creates some confusion over the terms “benefit corporation” and “B corporation.” Typically, companies certified by B Lab are called B Corporations or Certified B Corporations, while companies subject to their own internal standards or to other external standards are called benefit corporations or public benefit corporations, depending on the state in which they are incorporated. Many companies are both benefit corporations (a legal status) and Certified B Corporations (certified by B Lab), but some are one or the other.
5. What are some potential issues with benefit corporations?
Like LLCs 20 years ago, benefit corporations are relatively new and do not have nearly as much history or precedent as traditional for-profit corporations. For example, it is unclear how the investment and lending community will support benefit corporations and how courts will interpret their pursuits of benefits compared to profits.
Another potential issue with benefit corporations relates to the increased reporting requirements. Benefit corporations are required to report to their shareholders, and in some states, the public, about how well they met their benefit standards and other information. In Washington, D.C., each benefit corporation must prepare an annual benefit report describing:
• The third-party standard the corporation selected
• How the corporation pursued and met its general and any specific public benefits
• Any circumstances that hindered its pursuit of those benefits
• An assessment of the corporation’s performance against the third-party standard
• Any connection between the corporation and the entity that created the third-party standard
• The name, contact information and compensation of its benefit director and any benefit officer
• Compensation paid to the directors
• The name of shareholders owning 5 percent or more of the corporation’s shares
• A statement of the benefit director.
In Washington, D.C., the annual benefit report must be provided to shareholders, posted on the company’s website and if no website exists, provided to any member of the public requesting it, and provided to the D.C. government, although the directors’ compensation may be removed from all but the shareholders’ reports.
For those who want to accomplish some good in the world, the benefit corporation may be the right choice, but it is not for everyone. Legal counsel can help investors and entrepreneurs analyze their specific situations, and if a benefit corporation is the right choice, assist with the legal process.