Benefit Corporations 101

Henry Ford, the well-known industrialist and businessman, once sought to benefit his fellow man by distributing profits from his vastly successful company among his community and employees.[i] Learning that they were about to be deprived of a portion of the company’s profits, the Ford Company shareholders sued Ford.[ii] The Michigan Supreme Court ruled in favor of the shareholders, holding that Henry Ford, as the company’s president, owed a duty to maximize shareholder profits.[iii] Since 1919, society has changed and today the business owner seeking to make a profit while at the same time benefitting his or her community can do so. There are several different business entities available to achieve this goal, but one entity in particular offers business owners more flexibility in their public-benefit decision making. This entity is called a “benefit corporation.”

Benefit corporations allow directors of corporations to consider both social or environmental goals and shareholder profits in carrying out their obligations.[iv] These corporations are advantageous to corporate directors who envision their for-profit corporation making a social or environmental impact in their society. Benefit corporations are very similar to standard corporations, but they differ in four major aspects.

1. The benefit corporation’s articles of incorporation must include that the corporation’s purpose involves a general public benefit to society or to the environment.[v] Benefit corporations may also elect to serve a more specific public benefit[vi] such as providing low-income housing or reducing carbon emissions. This public benefit requirement is not featured in standard corporation purpose sections.

2. The Articles of Incorporation for benefit corporations are mandated by statute to provide a degree of accountability to stakeholders.[vii] Typical benefit corporation statutes require directors to consider the corporation’s shareholders, employees, and customers as well as the environmental and societal factors in making decisions for the corporation.[viii] Standard corporations do not require this consideration beyond its shareholders.

3. Benefit corporations have transparency requirements not included in traditional corporate models.[ix] Benefit corporations are required to make public benefit reports throughout the year detailing the corporation’s successes, failures, and efforts made toward achieving its social or environmental goals.[x]

4. Specific, legal causes of action are provided to certain stakeholders based on the benefit corporation’s breach in seeking to achieve its public benefit goals.[xi] The benefit corporation may grant a legal cause of action to specific individuals by expressly stating so in the corporation’s charter.[xii] Further, causes of action may be granted to certain stakeholders impacted by the corporation even without being mentioned in the charter.[xiii]

Benefit corporations may be formed from scratch prior to the existence of a corporation or from an already-existing corporation. After choosing to form a benefit corporation without an already-existing corporation, it is necessary to incorporate the benefit corporation in a state that permits benefit corporations.[xiv] Currently, benefit corporations are permitted in Arizona; Arkansas; California; Colorado; Connecticut; Delaware; Florida; Hawaii; Idaho; Illinois; Indiana; Louisiana; Maryland; Massachusetts; Minnesota; Montana; Nebraska; Nevada; New Hampshire; New Jersey; New York; Oregon; Pennsylvania; Rhode Island; South Carolina; Tennessee; Utah; Vermont; Virginia; Washington, D.C.; and West Virginia.[xv] Benefit corporation statutes have been introduced in nine other states.[xvi]

An already-existing corporation incorporated in a state that does not allow benefit corporations must undergo either a merger or a domestication in a state where benefit corporations are allowed.[xvii] Following the incorporation of the corporation in a state permitting benefit corporations, it is necessary to draft articles of incorporation (or amend already-existing articles of incorporation) stating that the corporation is to be deemed a benefit corporation and providing for the nature of the corporation’s public benefit goals, accountability, transparency to the public, and legal causes of action granted to stakeholders.[xviii] Finally, the articles of incorporation must be filed with the appropriate state agency, typically the Secretary of State.[xix] Special considerations apply to already-existing entities that are not corporations but are seeking to become benefit corporations.[xx]

The changing landscape of corporate law will likely result in benefit corporations being formed throughout the country. For the business owner seeking profit and public purpose, the benefit corporation may be the proper vehicle toward achieving his or her goals.

For more information on benefit corporations schedule an appointment with a Side Project attorney today.

References:

[i] Dodge v. Ford Motor Co., 170 N.W. 668, 671 (1919).

[ii] Id.

[iii] Id at 678.

[iv] Joseph Karl Grant, When Making Money and Making a Sustainable Societal Difference Collide: Will Benefit Corporations Succeed or Fail?, 46 Ind.L.Rev.581 (2013).

[v] Id at 583.

[vi] Id at 584.

[vii] Id at 583.

[viii] Id at 585.

[ix] Id at 583.

[x] Id at 586.

[xi] Id at 583.

[xii] Id at 588.

[xiii] Id.

[xiv] William H. Clark, Jr., How to Switch to Being a Benefit Corporation, DrinkerBiddle, 3 (June 2, 2015, 9:00 AM), http://benefitcorp.net/storage/documents/How_to_Switch_to_Being_a_Benefit_Corporation.pdf.

[xv] B Lab, State by State Legislative Status, Benefit Corp Information Center (May 28, 2015, 12:31), http://benefitcorp.net/state-by-state-legislative-status.

[xvi] Id.

[xvii] William H. Clark, Jr., How to Switch to Being a Benefit Corporation, DrinkerBiddle, 4 (June 2, 2015, 9:00 AM), http://benefitcorp.net/storage/documents/How_to_Switch_to_Being_a_Benefit_Corporation.pdf.

[xviii] Id.

[xix] Id at 5.

[xx] Id at 6.