Business Basics: Benefit Corporations

One of the main reasons we chose to start this blog was to help explain the facets and aspects of business that typically get overlooked. To help us do this, we decided that, every Tuesday, we are going to post a new “Business Basics” piece to discuss subjects that readers, despite being aware of, may not know much about. With that in mind, one of the first subjects we are going to look at is the Benefit Corporation.

What is a Benefit Corporation?

Benefit corporations are a fairly recent, though the practice of chartering a particular mission for a corporation has existed for centuries. Early American corporations were occasionally given a particular public service to fulfill – things like building bridges or maintaining roads. However, the modern benefit corporation is a bit different – instead of merely fulfilling a public service, it has to produce a distinguishable social good for society.

Let’s say that you create a company with a particular social mission in mind – donating ten percent of profits to wetlands preservation, for example. If you wanted to incorporate your business and raise money through selling shares, you would have to give up some control of your company to the shareholders. That could mean that, instead of continuing its social mission, the company merely focuses on producing the maximum amount of profit. Creating a benefit corporation, however, will help ensure your company can continue its social mission, even if that mission cuts into profits. Unfortunately, benefit corporations are not universally recognized, though 12 states have, as of this posting, enacted legislation recognizing Benefit Corporations.

How do you create one?

Requirements vary from state to state, but typically creating a benefit corporation is very similar to the regular process for incorporation. However, along with filling out a standard Articles of Incorporation, you typically have to include some sort of statement attesting that your corporation is a benefit corporation, along with the specific public benefit, or benefits, your corporation will pursue. You can also elect to become a benefit corporation, though doing so usually requires that you amend your governing documents and get approval from the shareholders.

Are there any special regulations or rules for Benefit Corporation?

Benefit corporations are legally required to create a positive impact on society and the environment, and most states require that benefit corporations find a third-party standard to measure that impact. Happily there are many groups that provide a free assessment service, and there isn’t any particular standard that benefit corporations must adhere to. After receiving the assessment, the benefit corporation’s directors create an annual benefit report that they make public and send to the shareholders. Some states also require an independent ‘benefit director’ to sit on the board and prepare a statement on how well the corporation is adhering to its social and environmental mission.

Any benefits?

Except for protecting a corporation pursuing a social mission instead of maximizing profits, there aren’t really any legal or tax benefits to creating a benefit corporation. However, creating a benefit corporation can help you attract socially minded investors. In 2011, the Institutional Shareholder Service compiled a report that states investors are increasingly “incorporating social and environmental considerations into” their decisions. Having a recognized benefit corporation can give you an edge with these types of investors. Just make sure you are committed to your ideals before choosing to form a benefit corporation – in most states that recognize the structure, anyone with more than a 5% share in the company can enact benefit enforcement proceedings if they feel the company is not adhering to its social mission.

Though they can be a bit confusing, the recognition of benefit corporations is a great development in the business world. If anyone reading has further questions, just ask them in the comment box below and we will try our best to answer them!