Is The Benefit Corporation The Right Entity For Your Business?
Many of our younger business clients, those of the “millennial” generation, often want to combine business profit with social good, building altruistic aspects into the DNA of their business. The rise of the benefit corporation allows them to do just that. A benefit corporation is a corporate entity that allows businesses to include positive impacts on society, workers, the community and the environment, as well as profit, into their corporation’s legally defined goals.
The key difference between a traditional corporation and a benefit corporation, or B Corp, involves what is called the “business judgment rule”. The business judgment rule gives directors great leeway in the business decisions they make while running the corporation. However, these decisions must generally be directed toward maximizing profit and shareholder value. This “maximization of shareholder value” can conflict with the company’s desire to create a public benefit, as such benefits may reduce the profit of the business. Benefit corporation’s legally expand the fiduciary duty of the directors of the B Corp to allow them to consider non-financial interests when make business decisions, providing directors the legal protection to pursue societal benefits, in addition to profit.
A benefit corporation has numerous components that new business owners should be aware of prior to decided to walk down the B Corp path. Currently, 31 States have enacted Benefit Corporation Legislation. A good resource to check your State’s B Corp legislation status can be found here.
The purpose of a benefit corporation is to create a “general public benefit.”
What qualifies as a “general public benefit” varies between the States and countries that
have adopted B Corp legislation. For instance, Colorado defines a public benefit as one that has “one or more positive effects or reduction of negative effects on one or more categories of persons, entities, communities, or interests other than shareholders in their capacities as shareholders, including effects of an artistic, charitable, cultural, economic, educational, environmental, literary, medical, religious, scientific, or technological nature.”
Generally, your company will create a public benefit if it creates a material (ie; reportable) positive impact on a segment of society while minimizing negative impacts.
In a B Corp, shareholders evaluate not only profits but the company’s positive impact.
Unlike traditional corporations, where shareholders tend to be more interested in the financial bottom line, B Corps require that shareholders be provided reports on the company’s performance regarding its beneficial impact. These is a key difference between a traditional corporation and a B Corp, and can create an internal conflict in the business between the need to be profitable and the need to work towards the “public benefit” that a B Corp requires. The reporting requirement to shareholders adds an extra level of accountability to the investors in your business.
B Corps have more extensive reporting requirements than traditional entities.
Benefit Corporations are required to publish annual benefit reports of their “beneficial impact”. These reports require adherence to a transparent, credible, independent third party standard. In some States these reports have to be filed with the Secretary of State of the jurisdiction. Some states allow for a “benefit enforcement proceeding” that provides shareholders the ability to enforce the company’s mission when the business has failed to pursue or create the general public benefit around which it is organized. This reporting requirement, and potential enforcement ability, is in addition to any normal corporate reporting requirements and can create an onerous addition to the entrepreneur’s already intense workload.
There is no tax benefit for organizing your business as a Benefit Corporation
A supposed tax advantage is one of the major reasons why clients often inquire into Benefit Corporations. Unfortunately, there is no actual tax benefit for organizing your business as a B Corp. They are taxed just like a C-Corporation or S-Corporation (depending on your tax election).
Overall, while B Corps allow for the entrepreneur to maintain control of their original altruistic ambitions when growing a company, they also require extensive reporting requirements that may be burdensome, especially for first time business owners. Additionally, organizing as a B Corp may limit the pool of investors that are interested in investing in your business. Without any additional tax benefit, B Corps can often be more trouble than they are worth for the new business owner. These factors should be considered carefully before deciding to organize your business as a B Corp. My recommendation is to consider converting your corporation to a benefit corporation before the first major capital raise. This allows the business to get its systems and procedures in place, and create a viable business model that incorporates the company’s public benefits, before adding the rigorous standards and reporting requirements necessary with B Corps.
Do you have questions regarding B-corps? Tweet us at @StarterNoise using #BCorp
Jeff Mohrmann is the founder and managing attorney of Rogue Mountain Law, LLC, a Colorado law firm that focuses on business law, bankruptcy and estate planning. When Jeff isn’t helping new businesses launch with success he can be found on the trails and slopes of Colorado. An avid cyclist, runner and snowboarder, he has competed throughout the country in a variety of running races and organizes everything from fundraising fun runs to beer marathons in his home town.