Legal Blog

An Overview of the Benefits of Benefit Corporations

corporate social responsibilityLast month, Kickstarter announced it had dropped its designation as “Kickstarter Inc.” to reform as a PBC: public benefit corporation. The crowdfunding site is one of a handful of corporate entities to do so in the past couple years, led by the examples of prominent, humanitarian-leaning companies such as Patagonia, Warby Parker, and Etsy. However, while some of its most recognizable names are headquartered in New York and California, the modern benefit corporation movement can be traced by to Maryland: the first state to pass benefit corporations legislation. These days, 29 other states, as well as the District of Columbia have similar laws, with additional states on the way in 2016 and 2017. As the barriers to entry diminish, more and more companies nationwide are considering following suit, becoming benefit corporations or similar hybrid structures—the terms vary. This article provides a brief overview of what those companies have to gain, and how benefit corporations and related classifications differ from other types of organizations.

What Is a Benefit Corporation?

A benefit corporation is for-profit, corporate entity that has written social and ecological impact into its bylaws. Built into the ideology is the “triple bottom line,” otherwise known as “people, planet, and profit.” Other circles refer to it as CSR: corporate social responsibility. Benefit corporations, also sometimes referred to as “hybrid corporations”, hold themselves legally accountable to this framework: their goal is not only to make a profit, but to cultivate some form of benefit for the communities and natural environment they influence. Benefit corporations conform to various operational differences versus a traditional, profit-only business model. A benefit corporation’s shareholders evaluate company performance on the trilateral measures listed above. The company commits itself to standards of transparency, meaning it must issue annual impact reports along with any other documentation as required by state law. Before stating this commitment, the company must also receive supermajority approval to update its bylaws. These changes notwithstanding, the company is subject to the same federal and state tax laws as its conventional peers. Benefit corporations differ from nonprofit organizations, as well as the similarly-named and somewhat analogous B Corp model. While a nonprofit must spend any surplus revenue toward its mission, a benefit corporation can split the excess among its shareholders, or apportion it toward a mix of profit and social and environmental impact. A B Corp, meanwhile, operates similarly to a benefit corporation, but its regulatory agency is different. B corps are certified by the nonprofit B Lab, while benefit corporations are regulated by their states. The two categories often overlap; many benefit corporations are also B Corps, and B Corp certification may be means or step toward benefit corporation status. B Lab acts as an interest and advocacy group for socially and environmentally focused entrepreneurs. Besides offering B Corp certification, the organization works toward passing legislation and providing analytics about the companies involved in the trend. Its benchmarks are not legally binding, and B Corp considers its accreditation analogous to LEED or Fair Trade certification standards.

Why Become a Benefit Corporation?

There are several compelling, commonly cited reasons companies choose to reincorporate as benefit corporations. For one, a benefit corporation may be in a better position to receive grants or venture capital. J.P. Morgan Chase values impact investment opportunities between 2010 and 2020 as high as $1 trillion, and several venture capital groups focus primarily or solely on funding benefit corporations. Nonetheless, angel investors such as David S. Rose warn that entrepreneurs must “make money or do something else,” signaling some skepticism of the model among financiers. Consequently, benefit corporations may have a narrower but more receptive funding pool. Aside from the possible advantages in securing immediate funding, benefit corporation status allows a business to stay closely aligned its values and founding vision, another selling point for potential investors. It also differentiates a company in its marketplace. Several reports, such as the 2013 Cone Communications/Echo Global CSR Study, indicate that consumers will switch brands, pay more, and stick with their choice for a longer period of time when choosing between a benefit corporation and traditional company. Finally, benefit corporations have legal protection from shareholders if a company realizes modest profits but has a significant impact on the environment or community. Because of their broadened focus, benefit corporations are relatively insulated from the financial performance measures that typically drive business decisions.

Where to Learn More about Benefit Corporations

As mentioned above, there are now 31 states that have passed benefit corporation legislation. Among these, there are several entrepreneurs should look for examples of robust laws as well as active benefit corporation communities: California, Delaware, Maryland, and New York. The regulatory environment is still in its very early stages, and laws vary state by state on several points. The main provisions to look for are…

  • Accountability and transparency: How often must benefit companies issue reports? How detailed do financial records need to be? Do companies have to report conflicts of interest? Are the state’s standards subject to third-party review?
  • Purpose: What is the level of specificity required in a benefit corporation’s mission statement? Are there other expectations or example language provided by the state?
  • Taxes: Does the state offer tax incentives for benefit corporations?
  • Assistance: Are consulting services available, and paid for by the state? Are there other incentives for benefit corporations to incorporate in that state?

A thorough comparison of all current legislation is beyond the scope of this article, and unfortunately, not every state provides immediate access to legislation information. Talk to an attorney to learn what your state requires. A legal professional can also advise you on whether becoming a benefit corporation is worth the investment. For further information and a list of all benefit corporations, see the directory here. As regulations and consumer awareness about benefit corporations continue to evolve and grow, expect even more coverage about this nascent sector to come.

ABOUT JONATHAN WACHS

Jonathan R. Wachs Jonathan Wachs provides strategic counseling and operational advice to clients in the areas of intellectual property, commercial transactions and outsourced legal departments. As head of the firm’s Intellectual Property Group, Mr. Wachs works closely with clients to develop, register, analyze, enforce, and transfer intellectual property assets in a customized, cost-efficient, and highly effective manner. Additionally, he conducts intellectual property audits through which clients learn the nature and value of their intellectual property assets and the steps needed to protect such assets from misappropriation or dilution. As a business lawyer, he has successfully negotiated and completed several multimillion dollar business transactions and has served as general counsel to several small and midsize businesses and organizations in various industries and professions. He also manages a blog about intellectual property issues, Friday Factoids. Mr. Wachs co-manages New Paradigm Counsel, a service through which Offit Kurman delivers customized, comprehensive and cost-effective outsourced legal departments. Through New Paradigm Counsel, Jon served as outsourced general counsel for a government contractor, a large printing business, a payment processing company and an identity theft restoration business. You can also connect with Offit Kurman via FacebookTwitterGoogle+YouTube, and LinkedIn.

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