Updated: Jul 17, 2020
Disclaimer: This post's content is not legal advice.
Here at Good Counsel Services, one of the most common types of corporations that the legal team works with is known as a Benefit Corporation or B-Corp. A benefit corporation is a new kind of business balances purpose and profit. It allows a business to pursue both profit and social impact goals at the same time.
Under traditional corporation law, there were only two main corporate options for an entrepreneur: a for-profit corporation and a non-profit corporation. A for-profit corporation’s primary goal is to generate profit and it is owned by shareholders who contribute money, property, or services and receive shares in return. The shareholders expect to profit from their investment through the issuance of dividends or the appreciation in the value of their shares.
Although this seems simple enough, if your for-profit corporation does not primarily focus on the generation of profit (say, you want to run a social impact initiative), you could be sued by shareholders for failing to meet their duties. By contrast, a non-profit corporation is formed for a charitable purpose and does not have owners. People giving it money are giving a gift and do not expect to profit from their contribution. Until recently, entrepreneurs had to choose between these two main legal structures, and could only claim the benefits of one, but not the other.
Why should your business become a benefit corporation?
Today, many states have legislation in place allowing for the creation of a benefit corporation. With this structure, a business can now pursue both a profit motive and a social impact motive as its primary goals. This entity combines elements of both nonprofit and for-profit corporations in order to allow for the simultaneous pursuit of social and financial bottom lines.
Here are some of the perks from having a benefit corporation:
Differentiate from your Competitors: By voluntarily choosing to abide by higher standards of transparency, accountability, and performance, benefit corporations are able to distinguish themselves as businesses for social good. Through this, benefit corporations can stand-out against competitors who claim to be “green” or “sustainable” yet do not have the same legal requirements or business forms.
Raise Mission-Aligned Capital: By becoming a benefit corporation, a business can attract various social investors to put their capital into a business that achieves high social and environmental impact while being structured to maintain their sales goals, financing, or IPO.
Protect your Mission: Through the benefit corporation structure and legal form, social impact missions can be ingrained into the business and survive even as the business grows, obtains new management, new capital, or new ownership. It also protects directors and officers from liability from pursuing non-financial social impact interests.
Benchmark your Performance: Through the annual benefit report, benefit corporations offer an objective third party standard of social impact measurement, allowing businesses to benchmark their own performance and showcase their progress publicly.
Although benefit corporations are taxed and subject to the same laws as traditional corporations in NYS, there are five major areas in which they differ. These are requirements concerning: Corporate Purpose; Accountability; Transparency; as well as unique provisions for Right of Action; and Change of Control, Purpose, and Structure:
Corporate Purpose: Businesses incorporating as a benefit corporation must create a “general public benefit,” in other words, having "material, positive impact on society and the environment." Examples include goals such as 50% of profits going to charity, being carbon neutral, having 100% local sourcing, etc.
Accountability: Benefit corporations are required to file an annual report covering the corporation's progress towards their social benefit known as an annual benefit report. This report must include a direct statement over whether the board had acted consistently with its obligation to create both a general and any specific public benefit purposes.
Transparency: In order to objectively assess its progress towards achieving a public social benefit, benefit corporations must measure their overall corporate social and environmental performance against a third-party standard, which must be published in the annual benefit report, to be shared with all shareholders and made public on the company’s website (excluding proprietary data), as well as filed with the Dept. of State.
Right of Action: Benefit corporation law in NYS provides unique causes of action for shareholders or directors who wish to sue for the failure of the board to meet their obligations. Like, for example, if the corporation fails to deliver or post an annual benefit report; or if any director or officer neglects, or fails to perform, his or her duties or standard of conduct as defined by the benefit corporation law. However, it must be noted that shareholders are the only stakeholder entitled to bring legal action against the corporation or its directors.
Benefit Corporations are a great way of going around traditional corporation law whose only two options are for-profit or non-profit business structures. Under a Benefit Corporation structure, your business can pursue both profit and social impact goals. Keep in mind, if your business is already a for-profit, in order to convert to a benefit corporation, your business must obtain a yes vote form at least ¾ of all classes of shareholders.
If you're not in New York State and would like to learn how to turn your business into a Benefit Corporation, here's a list of resources on how to do so in your state.