We have advised hundreds of companies and have found that certain preconceptions about business affect the way they are set up and run. The historical belief that corporations exist solely to maximize profit for shareholders has had a profound impact on how companies operate. However, when analyzed closely, profit mandates give those in charge much less choice than they might prefer, and the sustainable business movement has felt the constraints of this legal model.
This has caused many to ask: what if a corporation was able to seek profits while also considering potential benefits to society? The answer in 27 states is the addition of the “benefit corporation.” A benefit corporation is the term used when a company is created under corporate law and should not be confused with a “B Corp,” which refers to a company that is certified by B Lab to meet specific standards for social and environmental performance.
What Are the Benefits of Being a Benefit Corporation?
Incorporating as a benefit corporation legally protects an entrepreneur’s social goals by mandating considerations other than just profit. By giving directors the secured legal protection necessary to consider the interest of all stakeholders, rather than just the shareholders who elected them, benefit corporations can help meet the needs of those interested in having their business help solve social and environmental challenges.
Additionally, the demand for corporate accountability is at an all-time high, with many consumers already aligning their purchases with their values. The benefit corporation status is a great way to differentiate your company from the competition and capitalize on these customers.
What Are the Drawbacks of Being a Benefit Corporation?
One of the major drawbacks is expanded reporting requirements. This is to provide shareholders with adequate information to determine if your business is achieving its stated purpose. Each year a benefit corporation must give each shareholder an annual report.
Key to this report is the requirement of a “third party standard” for assessing overall performance, and the process for selecting this third party standard must be explained within the report. The report must also indicate the efforts made to achieve a general public benefit or the circumstances that hindered that achievement. Finally, if the benefit corporation has a website, it must post this annual report on its site.
Another potential drawback is uncertainty. benefit corporations are fairly new legal entities. It is unclear how courts will interpret their mandates to not only seek profits, but also to consider potential benefits to society. Furthermore, the impact on raising capital and how angel investors and venture capitalists will react remains uncertain.
How Do You Form a Benefit Corporation?
There are a few legal requirements to consider when forming a benefit corporation. The benefit corporation legal requirements vary between states, and this discussion is limited to California law.
Firstly, your company name. A benefit corporation does not need to make any reference to its benefit status within its corporate name. Therefore, those considering a benefit corporation don’t need to alter the name they’ve chosen, nor tailor their brainstorming any differently than if they were considering a standard C Corporation.
However, a benefit corporation must state that it is a benefit corporation within its articles of incorporation. Additionally, the benefit corporation may contain within its articles a specific purpose (such as to further the arts, improve public health, etc.), but it is not required to do so.
Finally, the share certificates of a benefit corporation must specifically state the benefit nature of the corporation. Generally, all other provisions relating to the shares and their transfer are provided within the state’s general corporate law.
For entrepreneurs, business owners, workers and consumers, the introduction of the benefit corporation is an exciting development. Community and environmentally minded business owners can preserve their social goals without sacrificing the ability to make a profit.
If you have any questions or comments about the process of becoming a benefit corporation, please reply below.
This article was co-authored by Doug Bend and Alex King.
*Disclaimer: This article discusses general legal issues, but it does not constitute legal advice. The general legal principles are based on California law and may not apply to corporate laws in other jurisdiction. No reader should act or refrain from acting on the basis of any information presented herein without seeking the advice of counsel in the relevant jurisdiction. Bend Law Group, PC expressly disclaims all liability in respect of any actions taken or not taken based on any contents of this article.
Doug Bend is the founder of Bend Law Group, PC, a law firm focused on small businesses and startups. He is also the General Counsel for Modify Industries, Inc. and tIFc LLC and a Legal Mentor in The Hub Ventures Program.
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