Benefit corporation legislation is effective in over half the country and numerous states are working on it. For state by state information, click here.
No. Benefit corporations are neither nonprofits nor hybrid nonprofits. They are for-profit companies that want to consider additional stakeholders, morals or missions in addition to making a profit for their shareholders. Nonprofits cannot be benefit corporations, but they could create one. Because of the public benefit purpose provisions, expanded fiduciary duties of directors, and additional shareholder rights created within the model benefit corporation legislation, this structure could be useful to operate and scale the earned-income activities of a nonprofit.
No. Benefit corporations do not have to be audited or certified. Not by B Lab; not by anyone. Benefit corporations and Certified B Corps are different. You can learn more about that here.
Many different types of businesses have become benefit corporations since the first law was passed in Maryland in 2010. The benefit corporations currently incorporated in the United States come from many different industries, including retail, manufacturing, tech, service, professional services, private education, and food and beverage production. Benefit corporations also come in all sizes, from small one-person service companies to large-scale international brands with many employees.
A few examples of well-known benefit corporations include Method, Kickstarter, Plum Organics, King Arthur Flour, Patagonia, Solberg Manufacturing, Laureate Education and Altschool. You can see B Lab’s best attempt to track the number of benefit corporations here.
Benefit corporations have raised capital from many different types of investors in the private markets from traditional to impact focused funds. An increasing number of investors are also supporting their own portfolio company’s adoption of benefit corporation status. To see case studies of benefit corporations raising capital and a non-exhaustive list of investors that have a benefit corporations in their portfolio click here. To investigate some of the reasons why investors might like benefit corporations click here. For an investor FAQ click here.
Benefit corporations are also moving into the international and public markets. In October Laureate Education, the largest degree-granting higher education institution in the world, announced that it was filing an S-1, and that it would do so as a benefit corporation. Laureate's 88 institutions across 28 countries graduate on average nearly 60% of their 1 million students (roughly the same graduation rate as for all U.S. higher education institutions), at least 34% of whom are from underrepresented populations. With over $4 Billion in revenue, Laureate is also the largest benefit corporation in the world. Italy also made news in December when they became the first country outside the US to pass benefit corporation legislation.
Yes, the benefit corporation form was designed to protect the mission of a company when it goes public. There are currently no public benefit corporations. However, in October 2015 Laureate Education, the largest degree-granting higher education institution in the world, announced that it was filing an S-1, and that it would do so as a benefit corporation. Laureate's 88 institutions across 28 countries graduate on average nearly 60% of their 1 million students (roughly the same graduation rate as for all U.S. higher education institutions), at least 34% of whom are from underrepresented populations. With over $4 Billion in revenue, Laureate is also the largest benefit corporation in the world. Natura, a public company traded on the Sao Paulo Stock Exchance with a $12B market cap, amended it's articles to include stakeholder comittments similar to the commitments found in the benefit corporaiton statute. Natura's instiatutional shareholders, including T.Rowe, Lazard and Oppenheimer approved this legal amendment by voting in favor. You can ready Laureate's S-1 here.
Shareholders retain all the protections that they have in a traditional corporate model. First, they have all their corporate governance rights. They elect the directors and vote on major corporate transactions such as charter amendments or mergers. Conflict transactions will still be subject to a searching entire fairness analysis whenever challenged, so that directors cannot pursue their own interests ahead of the interest of shareholders. Shareholders will retain the ability to bring the same types of lawsuits they can bring against a traditional corporation, including demands to review the company’s books and records, election review proceedings to make sure elections are being conducted fairly, and derivative suits to pursue corporate claims against directors for breach of fiduciary duty. The only change under the benefit corporation model is the value proposition: the idea that true long-term value is built by aligning all stakeholder interests, including the interests of shareholders.
- High vote into and out of form gives shareholders “mission insurance” over the long-term
- Private right of action allows shareholders to enforce mission
- Annual benefit report provides transparency regarding progress towards mission
- In the absence of applicable case law, director decisions will be treated with similar deference to that afforded other business judgements under current law.
If you are starting a new company, you can simply incorporate as a benefit corporation in any state where legislation has been passed. The procedure for incorporation is nearly identical to that followed for any other corporate structure with the addition of a statement that the company is a benefit corporation. For state by state instructions click here.
If you have an existing company, you can elect to become a benefit corporation by amending your governing documents. Amendment requires a 2/3 super-majority vote of all shareholders in most states. The procedure for filing amendments with the state is identical to that followed for any other corporate structure with the addition of a statement that the the company is a benefit corporation. For state by state instructions click here.
Consult state requirements: The specific requirements for benefit reports differ slightly from state to state. More information on requirements for your state is available here.
Follow best practices: B Lab believes that there is a best practice for benefit reporting, which are reflected in the model legislation. More information on best practices is available here.
Choose a third-party standard: Benefit corporations are required to use a third party standard to assess their creation of general public benefit over the course of the previous year, but do not need to be certified or audited by this third party standard. B Lab believes that the B Impact Assessment is the best available standard for benefit corporations. The B Impact Assessment is available for free for those that do not wish to have a verified or certified report. More information on choosing a third-party standard can be found here.
Check out examples of benefit reports.
Yes. To see a listing of these attorneys, click here.
No. Third parties do not have legal standing to sue a benefit corporation, unless granted by the shareholders.
No. B Lab is has not been told by the more than 3000 existing benefit corporations across the country that they have had difficulty obtaining D&O insurance or been asked to pay a higher premium.
This experience is corroborated by meetings with brokers at Marsh McLennan and underwriters from several major D&O (director and officer) insurance carriers, including ACE, Chubb and Zurich.
Some say that over time benefit corporation might enjoy reduced rates as a result of their enhanced governance regime and stakeholder engagement.
Directors must manage the corporation in a responsible and sustainable manner.
Directors must manage or direct the business and affairs of the benefit corporation in a manner that balances the pecuniary interests of the stockholders, the best interests of those materially affected by the corporation’s conduct, and the specific public benefit or public benefits identified in its certificate of incorporation.
Directors must also provide a biennial, annual in Colorado, report to the shareholders on the corporation’s promotion of the public benefit identified in its certificate of incorporation and of the best interests of the stakeholders.
- The benefit corporation acted in accordance with its general public benefit purpose and any specific public benefit purpose in all material respects during the period covered by the report.
- The directors and officers created general public benefit.
- If, in the opinion of the benefit director, the benefit corporation or its directors or officers failed to act or comply in the manner described above, a description of the ways in which the benefit corporation or its directors or officers failed to act or comply.
Some states have passed, “constituency” statutes, which permit directors of traditional corporations to consider the same type of non-financial interests that directors of benefit corporations can consider, However, constituency statutes do not commit directors to considering these other interests, and thus do not create the accountability created by benefit corporation statutes. For a discussion of accountability under benefit corporation law, see here. Moreover, constituency statutes do not provide for any transparency with respect to the board’s consideration of the non-financial interests. For a discussion of transparency requirements under benefit corporation law, see here.
An LLC could currently amend its membership agreement to incorporate any of the benefit corporation provisions. However, because LLC law is based on contract law institutional investors prefer the corporate structure, which is constructed in statute and case law, over LLC’s. Any company with plans to raise outside capital or go public is better off with a corporate rather than an LLC structure. The benefit corporation thus provides the most effective corporate structure for scaling social enterprise and innovation.
Based on our analysis of mission-driven businesses, and because they are legally obligated to create a material positive impact on society and the environment and to consider the impact of their decisions on all stakeholders, there are three primary ways benefit corporations help nonprofits: more charity; more volunteerism; and fewer problems. Due to the imperative to create general public benefit, benefit corporations will be more likely to donate a higher percentage of their profits than ordinary corporations to support nonprofits. Benefit corporations are also more likely create opportunities for their employees to volunteer for nonprofit organizations and are less likely than ordinary corporations to create or exacerbate social or environmental problems as a result of their business practices.
Certified B Corporations (see explanation of the difference between Certified B Corporations and benefit corporations above), are very similar to benefit corporations and empirical data shows they give significantly more than the market average to charities and volunteer more of their employees’ time to charitable causes than their traditional corporate counterparts.
Before embarking on an effort to pass benefit corporation legislation, please contact B Lab. We have been the spearhead of advocacy and education in the passage of legislation in all 27 states and also working on passing legislation in 16 more states. We can provide a wealth of experience, information and materials that can aid in your the legislative and advocacy process. B Lab also works with attorneys from Drinker Biddle & Reath who can draft legislation specifically for your state. You can find more detailed information on B Lab’s recommended best practices for the benefit corporation legislation legislative process here.
B Lab recommends using the model legislation for the basis of any new legislation. B Lab and the pro-bono attorneys at Drinker Biddle & Reath are available to draft a version of the legislation tailored to your state’s specific corporate law. Using the model legislation has several important advantages:
- Expertise. The Model Legislation was drafted by Bill Clark from Drinker, Biddle, & Reath LLP and has evolved based on input from state legislatures, state bar associations, Secretaries of State offices, Attorneys General offices, associations, nonprofit groups and businesses in the states in which the legislation has been passed or introduced. It reflects the expressed needs of business leaders and investors interested in using the power of business to solve social and environmental problems, and has been conformed to local corporate codes by local corporate attorneys.
- Consistency. Using the model legislation ensures that your state remains consistent with the other states that have passed the legislation. This is particularly important for investors who rely upon this consistency to reduce their due diligence requirements when evaluating a company. The ability to recognize that a benefit corporation is the same in Illinois as it is in Florida allows the free market to function effectively.
- Conformity. The Model Legislation has been drafted so that the existing corporation code applies to benefit corporations in every respect except those explicitly stipulated in the Model Legislation. This drafting approach avoids the potential legal and administrative issues that will arise in keeping a new corporate form in conformity to the corporation code as changes to the corporation code occur over time.
It doesn't. Benefit corporation legislation is cost-neutral or low cost and in some states has been a revenue generator. Benefit corporations are still taxed as a C or S corp and so state tax revneue should not change.
Many benefit corporations are required to publicly publish an annual benefit report that includes "an assessment of [its] overall social and environmental performance against a third party standard." In most states, the statutes simply require the use of a third party standard as a rubric for producing the report, similar to how we use the third party created Generally Accepted Accounting Principles (GAAP) for financial reporting.
The transparency requirement is intended to help the benefit corporation, directors, shareholders, investors and the general public determine whether the benefit corporation has met its expanded corporate purpose to create general public benefit.
In the model legislaiton, a third party standard is defined as "a standard for defining, reporting, and assessing overall corporate social and environmental performance".
- Government has no role in determining whether a selected third party standard is acceptable or whether the benefit corporation has met its benefit corporation purpose to create a material positive impact;
- Benefit corporation legislation does not require benefit corporations to adopt any particular third party standard in preparing its annual benefit report; and
- Benefit corporation legislation does not require the annual benefit report to be audited or certified by the standards organization.
It is up to the benefit corporation, the directors, and ultimately the shareholders, to judge whether any particular third party standard fits the statutory definition.
Most importantly, the primary objective of this legislation is to create a new corporate form that can not otherwise be achieved under our current laws and case law. This objective requires the legislation to consider society and the environment, in whatever way the company wishes, and not simply to consider one-off safe harbors that can arguably be done already under law.
The ‘general public benefit’ purpose helps prevent abuse of this legislation by corporations interested in green-washing. Without the ‘general public benefit’ purpose, a corporation could name a single, narrow ‘specific public benefit’ purpose (e.g. keeping the river in back of the factory clean from toxic effluents) and then ‘consider’ and dismiss all other non-financial interests when making decisions, which would not meet the primary objective of this legislation to create a new corporate form whose corporate purpose requires it to create benefit for society generally. Additionally, without the continual consideration of society and the environment a company could choose a short-term safe harbor and still be considered a benefit corporation after the consideration is completed. The legislation prevents this and allows the company flexibility to change with the dynamic forces of the market.
To meet the transparency provisions of model benefit corporation legislation, all benefit corporations are required to create a benefit report. The transparency provisions serve not only to inform shareholders so they are better able to exercise their rights, but also to inform directors so they are better able to meet their duties and finally the public about the overall social and environmental performance of the benefit corporation.
In a benefit enforcement proceeding, judges may also look to a benefit report, or series of annual benefit reports, to determine if the benefit corporation has met its statutory requirement to meet its general, and any named specific, public benefit purpose.
No. Benefit corporations are for-profit entities and do not offer philanthropists the same tax advantages as donating to a nonprofit organization. Benefit corporations seek equity or debt investments that presume a return on investment for the investors, while nonprofits seek charitable donations that presume no return. Benefit corporations simply expand the range of opportunities for individuals or institutions to use their investment capital – not just their philanthropic dollars - to create a positive impact on society and the environment.
Chronicle of Philanthropy, 'Businesses with a Social Conscience' by Phillip Henderson, President, Surdna Foundation