Is a Benefit Corporation Right for You?
The “benefit corporation” is a relatively new type of business entity. In 2010, Maryland became the first state in the U.S. to enact a statute recognizing and providing for the organization of this form of entity. In September, Maine joined 30 other states that have enacted benefit corporation legislation over the past nine years, and such legislation is currently pending in several more states.
While benefit corporations seem attractive on the surface, they are often misunderstood and require many considerations before they should be formed. Read on to discover how they differ from traditional corporations and what the pros and cons may be to organizing a business as a benefit corporation.
What is a benefit corporation?
A benefit corporation is a for profit entity that, by statute, exists not only to profit its shareholders, but also to benefit the general public in some way. In other words, benefit corporations’ directors are permitted by statute, generally, to make decisions that are not solely or even primarily in the interest of returning profits to shareholders, but are instead to further some public benefit. Under some states’ statutes, the corporation may specify in its incorporation documents the particular public benefits it is being formed to provide, such as protection or restoration of the environment, or improvement of human health. Most statutes, however, do not require incorporators to specify any particular “benefit” of a benefit corporation and under most states’ laws the beneficial purpose can be very general.
How does a benefit corporation differ from a traditional corporation?
Historically, states have granted corporations rights to exist to facilitate value creation and, in particular, to maximize value for the corporations’ shareholders by directors, who by law are responsible to act only in the interests of their shareholders. While the so-called “business judgment” rule gives directors of traditional corporations some leeway, a director of a traditional corporation is exposed to the risk of legal action if a shareholder alleges that the director is not making decisions with the single goal of maximizing the value of that shareholder’s equity interests. A director of a benefit corporation, however, must consider not only how his or her decision will affect profit, but also how that decision will impact society, the environment and/or the general public.
Why would a business want to organize as a benefit corporation?
Not every businessperson is motivated solely by profit-making. Indeed, many business owners and directors desire to both “do well and do good”, that is, use their businesses not only as vehicles to reap profits for distribution to shareholders, but also to positively impact their local community, or the global community for that matter. Organizing a for profit business as a benefit corporation enables ownership to differentiate the business from traditional corporations by setting forth a corporate mission and adhering, as it must by law, to certain standards and values. Benefit corporations also give some flexibility to their owners and directors. For instance, the owners or directors of a benefit corporation may wish to build a factory in a city that, despite relatively high costs of doing business, promises the opportunity for the business to employ a diverse workforce. Or, the owners or directors of a benefit corporation may wish to sell the business not to the highest bidder, which would maximize value for shareholders, but rather to a buyer who pays a lower price but is committed to carry on the corporation’s values after sale. Under most states’ corporate laws, the traditional corporation affords owners and directors much less flexibility in connection with such decision-making.
Most benefit corporation statutes provide protection from personal liability to the entity’s directors and officers in the event the benefit corporation fails to pursue or create general or specific public benefit. Depending upon the state, citizen suits based on a benefit corporation’s failure to pursue or create a public benefit may or may not be allowed, and the corporation itself may or may not be liable for monetary damages. Most states’ statutes permit shareholder derivative actions against the corporation itself for such failure.
What standards does a business need to satisfy in order to be a benefit corporation?
The standards required of benefit corporations are specified by statute, which vary from state to state. As a general rule, benefit corporations must satisfy three requirements to qualify for and maintain benefit corporation status.
How are benefit corporations taxed?
Benefit corporations are taxed no differently than traditional corporations. A benefit corporation can choose to be taxed as an S or C type corporation (which are federal tax statuses). As of this writing, there are no federal tax benefits available to benefit corporations simply for being organized as such.
How does a business become a benefit corporation?
In order to become a benefit corporation, the incorporator may file articles of incorporation as outlined in the state’s statute in any state that recognizes benefit corporations. Most such statutes also provide for the conversion of existing entities into benefit corporations by amending the corporation’s formation documents, usually with the consent of at least a supermajority (typically 2/3rds) vote of shareholders.
As you can see, there are both advantages and disadvantages to doing business as a benefit corporation, which may be more pronounced depending upon the particular requirements of the state law at issue. Any business considering benefit corporation status would benefit by seeking the advice of competent and experienced legal counsel. Verrill’s Business Law Group can help assess whether a benefit corporation is right for your business, and if so, guide you through the incorporation or conversion. Please contact Kevin O’Connell, Charles Bacall, or another member of Verrill’s Business Law Group with any questions regarding benefit corporations and entity formation.
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