If you're thinking about starting a business that has a purpose related to social good or public benefit, such as one with an environmental initiative, you may want to consider forming a public benefit corporation rather than taking the more traditional nonprofit route.
Unlike a nonprofit organization, a public benefit corporation (PBC) can pursue a public benefit purpose while also engaging in profit-generating activities. This key distinction underlies many of the advantages of forming a PBC.
Public benefit corporation overview
A hybrid entity that was first introduced in California, a public benefit corporation is a fairly new concept that has taken off in a relatively short time period. More than 30 states now provide legislation permitting the formation of public benefit corporations, although each state has its own rules governing their structure, operation, and other specifics.
Despite being relatively new, there are already many well-known corporations structured as PBCs. Examples include the crowdfunding site Kickstarter, the popular podcast This American Life, and the college education company Laureate Education, which holds the distinction of being the first PBC to go public.
Advantages of a public benefit corporation
The benefits of this type of corporation structure stem primarily from the PBC's altruistic purpose and include:
- Social good as a priority. Because its public benefit purpose is mandated in its formal documents, the company is able to prioritize social good alongside the traditional corporate goal of generating profits.
- Directors' liability. The board of directors can make decisions based on the company's public benefit purpose without fear of liability, even if profit might be affected.
- For-profit activities. Unlike a nonprofit organization, however, the PBC is still a for-profit corporation, just like a limited liability company (LLC) or C corporation. This means the PBC still pursues profit as one of its purposes and can participate in profit-generating activities, which a nonprofit with 501(c)(3) tax-exempt status cannot do.
- Accountability and transparency. Due to factors such as its public benefit purpose and legislated reporting requirements, a PBC provides the socially conscious investor or consumer with an enhanced level of accountability and transparency, which often adds to its overall appeal.
The nonprofit mutual benefit corporation
In addition to a nonprofit organization and PBC, you also have the option of forming a mutual benefit corporation. Unlike a nonprofit organization that holds 501(c)(3) tax-exempt status, a mutual benefit corporation is formed primarily for the benefit of its members, such as a club or homeowners association.
Because most mutual benefit corporations do not benefit the general public, they lack a charitable or religious purpose.
As a result, they do not qualify for tax-exempt status, despite their nonprofit orientation. That makes filing taxes for a mutual benefit corporation much like filing taxes for a regular corporation.
Just because you want your new startup to pursue a social good doesn't mean you're restricted to the nonprofit corporate structure for your new company.
In many ways, the hybrid public benefit corporation gives the socially conscious business owner the best of both worlds: the ability to both generate profits and contribute to the social good.