If you wish to promote a social or environmental benefit as part of your company's purpose, consider creating a benefit corporation.
More than 30 states, and the District of Columbia, allow benefit corporations. Additional states will likely be enacting benefit corporation laws in the future. To determine if your state allows benefit corporations, you can check with the agency that regulates corporations in your state or check for current online listings. A few states also have a similar type of entity, called a social purpose corporation, which may differ from a benefit corporation in various ways, depending upon the state.
What is a benefit corporation?
A traditional for-profit corporation's sole duty is to maximize profits for shareholders. Taking action to promote a social or environmental cause that does not serve profits could be considered a violation of this duty, subjecting the officers and directors to lawsuits by shareholders.
A benefit corporation, which still operates for profit, has an added social or environmental purpose. This allows the officers and directors to act in furtherance of the stated social or environmental purpose without violating their duty to the shareholders.
In a benefit corporation, officers and directors actually have a duty to balance the goals of making profit and serving the stated public benefit.
A social benefit corporation or an environmental benefit corporation must meet the requirements of the state where it is organized.
Benefit corporation vs. B-Corp certification
A benefit corporation is organized under a state's benefit corporation laws. A benefit corporation that has been certified by the nonprofit organization B Lab is called a certified B-Corp.
Although you may see a benefit corporation referred to as a B-Corp, technically, it's not a B-Corp unless certified by B Lab. In other words, all certified B-Corps are benefit corporations, but not all benefit corporations are certified B-Corps.
Benefit corporation vs. nonprofit corporation
A benefit corporation has two main advantages over creating a nonprofit corporation: The benefit corporation is much simpler to establish and can profit. It is a rather complex process to secure and maintain the tax-exempt status of a nonprofit.
Benefit corporation taxation is the same as for any other for-profit corporation. There is no separate IRS classification for a benefit corporation. A benefit corporation can elect to be taxed as either a C-Corporation or an S-Corporation, but it cannot obtain tax-exempt status as a nonprofit does.
Advantages and disadvantages of a benefit corporation
Compared with a traditional for-profit corporation, a benefit corporation has both advantages and disadvantages. Some things that are advantages in one way may be disadvantages in another.
Benefit corporation advantages include:
- Added officer and director liability protection. As stated above, the addition of a stated beneficial purpose allows managers to further that purpose without being subject to shareholder lawsuits for violating the duty to pursue profits.
- Attracting certain investors. A benefit corporation may attract the type of investor looking for what they consider to be a socially or environmentally conscious company. This may or may not offset the loss of potential investors who are mostly profit-driven.
- Attracting employees and customers. Customers, and prospective employees, may be attracted to a company with a visible beneficial purpose.
- Easier to sell the business. With the sale of a traditional for-profit corporation, it is generally considered the duty of directors to obtain the highest price to maximize shareholders' financial interests. With a benefit corporation, sustaining the beneficial purpose is also a consideration, so obtaining the highest price may not be necessary. In fact, obtaining the highest price at the expense of the beneficial purpose could be grounds for a shareholder lawsuit.
Benefit corporation disadvantages include:
- Added officer and director liability. In some states, the law allows shareholders to file suit against officers and directors for failing to pursue the stated social or environmental purpose of the corporation.
- Additional reporting. A benefit corporation is typically required to publish an annual benefit report stating how the corporation has fulfilled its benefit purpose using some independent, third-party standard.
- Difficulty obtaining investors. Investors who are mostly or solely looking for profits may prefer to invest in a traditional for-profit corporation.
How to become a benefit corporation
A new business can be formed as a benefit corporation, and an existing corporation can be converted to a benefit corporation. This needs to be done according to the state's laws where the business is incorporated.
A benefit corporation is formed just like a traditional for-profit corporation by filing articles of incorporation with the appropriate state agency. However, benefit corporation articles of incorporation will include a statement of its social or environmental purpose.
Converting an existing corporation to a benefit corporation will typically involve filing amended articles of incorporation that add a beneficial purpose statement. This may require a two-thirds super-majority vote of shareholders. The fee for filing amended documents varies from state to state.
If you would like your corporation to have the freedom to pursue a public benefit and make a profit, consider forming a benefit corporation. More information about benefit corporations can be obtained from the agency in your state regulating corporations. You also may want to work with an online service provider to establish your B-Corporation.
Find out more about Business Management