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Benefit Corporations

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Balancing Profit and Purpose: The B Corp and the Benefit Corporation


Today’s blog entry seeks to clarify the confusion between “B Corp” and “benefit corporation”, which terms are commonly and incorrectly used interchangeably, and speak to the features and requirements of both. 

It all started with B Lab, a nonprofit organization responsible for (a) writing the benefit corporation legislation that has now been enacted by 26 states and D.C., and (b) overseeing and administering the private “B Corp” certification process.  A benefit corporation is a type of entity under state law, and B Corp certification is a private certification conferred by B Lab on business entities that apply for such certification. 

As of August 2014, B Corp certification has grown into a community of 1,052 B Corp entities in 34 countries (739 in the United States alone), spanning 60 industries, approximately 20 of which are in the U.S. legal services industry.  The benefit corporation is a recent phenomenon, first appearing in 2010 in Maryland.  Companies like Dogeared, EO Products and Patagonia (the first benefit corporation in California), are both certified B Corps and benefit corporations.

Here are some of the key characteristics of the B Corp and benefit corporation:

Becoming a Certified B Corp
  • Any type of for-profit entity can apply to B Lab to become a certified B Corp.
  • To become a B Corp, one must (a) complete the “B Impact Assessment Survey” and score at least 80/200, (b) sign a Term Sheet and Declaration of Independence, and (c) if required, amend its governing documents to include the “B Corp Legal Framework” which requires that the company consider the impact of its decisions not only on shareholders but also its employees, customers, suppliers, community and the environment.
  • B Corp certification is for a two-year term and subject to an annual certification fee ranging from $500 – $25,000 annually (based on the B Corp’s annual sales).
  • B Corp certification is similar to a license and may be terminated.
Becoming a Benefit Corporation
  • A benefit corporation is legal entity and specific type of corporation that may only be formed in a state (including California) that has enacted legislation authorizing its creation.
  • Every benefit corporation is required by law to have a general or specific (optional) public benefit purpose.
  •  An existing corporation can become a benefit corporation by amending its Articles of Incorporation and Bylaws.
  • A change to or from a benefit corporation is a corporate entity change that requires 2/3 shareholder approval.  Any shareholders who vote against a conversion from a corporation to a benefit corporation can force the corporation to purchase their shares at fair market value.
Expansion of Fiduciary Duties 
Traditionally, a director’s and officer’s obligation is to manage the corporation to provide a return to its investors.

The B Corp certification attempts to modify the fiduciary duties of the governing body and officers by requiring a company’s governing documents to state that they must consider multiple stakeholders, not just shareholders.

The benefit corporation creates a new legal framework that requires directors to consider “shareholders, workers, suppliers, customers, the community and society at large, the local and global environment, and the short and long terms interests of the benefit corporation”.  Likewise, the officers must consider the impacts of their actions on the same group.  Therefore, in addition to traditional responsibilities, a director or officer of a benefit corporation must also consider the general or specific public benefit of his or her actions.

Benefit Enforcement Proceedings 
A benefit corporation is subject to a “benefit enforcement proceeding,” a unique cause of action asking the court for an equitable remedy to require the benefit corporation to pursue its general or specific public benefit.  A benefit enforcement proceeding may only be brought by the corporation itself, a shareholder or director, and persons specified in the corporation’s articles or bylaws as beneficiaries of the corporation’s purpose.  The benefit corporation cannot be found liable for monetary damages; however, if the court finds that the benefit corporation’s failure to comply with the Benefit Corporation Law was without justification, the court may award the plaintiff its reasonable attorneys’ fees and costs.

Reporting & Audits 
B Lab makes the results of each B Corp’s “B Impact Report” publicly available on its website, and B Lab randomly audits 20% of all B Corps over the two-year certification period.

The benefit corporation law imposes reporting requirements by requiring a benefit corporation to prepare a special annual report (called a “benefit report”), which includes information such as how it pursued its general or specific public benefit, any circumstances that hindered the pursuit of a general or any specific public benefit, and an assessment of its social and environmental performance.  The benefit report must be made available to the public on its website, if any, or otherwise a copy must be provided without charge to anyone requesting it.

Choosing a Path 
Each company has to consider how best to achieve its goals.  Is it considering becoming certified as a B Corp or becoming a benefit corporation because it is the right thing to do?  For positive publicity?  Because customers are giving preferential treatment to B Corps and/or benefit corporations?  Consider which public benefits the company pursues or wants to pursue; if they are already part of the company’s culture, and all owners agree, then the benefit corporation route makes sense and, if the company is already a corporation, relatively easy to achieve.  Take a look at annual reports for the past few years--does the company already publicize the benefits it promotes?  If so, then publishing annual reports conforming with the public benefit law should not impose a burden.  If the company is not a corporation, check with its attorneys and accountants regarding the impact of conversion.  If the company is considering B Lab certification, take a look at the B Impact Assessment Survey to get a sense if the company’s current practices qualify for B Corp certification, and check the license fee schedule to determine the bi-annual expense.  If the company changes direction and abandons its public benefit purpose, it is easier to let the B Corp certification lapse than it is to convert from a benefit corporation to a standard corporation.
Be sure to do your homework when deciding which path is best for your company, and don't forget to enjoy the journey.

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The New California Hybrid Forms Hit the Street January 1, 2012: The Benefit and Flexible Purpose Corporations

As a result of California laws enacted on October 9, 2011, entrepreneurs and existing corporations have two additional “hybrid” corporate forms to choose from beginning January 1, 2012: “Benefit” and “Flexible Purpose” corporate entities. Prior to the enactment of AB 361 (Benefit Corporation, California Corporations Code sections 14600-14631) and SB 201 (Flexible Purpose Corporation, California Corporations Code sections 2500-3503), entrepreneurs were forced to choose between forming as for-profit or nonprofit corporations.

Previously, directors of for-profit corporations engaging in charitable acts or promoting socially responsible policies would do so at the risk of the perception that they were impermissibly putting social purposes ahead of shareholder returns. Similarly, nonprofit corporations might risk losing tax-exempt status if they were perceived to engage in profitable activities rather than serving the 

public interest. As a Benefit Corporation or Flexible Purpose Corporation, organizations can legally pursue both socially responsible and profit-producing purposes at the same time. Both entities will be subject to the same taxes as for-profit corporations.

AB 361: The Benefit Corporation
The idea behind Benefit Corporations has been around since the early days of the United States when states began chartering corporations to achieve a specific public purpose, such as building bridges, roads and other infrastructure. Many argue that social ills came about as corporations became bound to maximize profits and were no longer chartered with a public purpose. Benefit Corporation legislation allows corporations to legally return to pursuing a specific public purpose.

Maryland enacted the first Benefit Corporation law in April 2010. Subsequently, Hawaii, New Jersey and Vermont enacted similar laws. Benefit Corporation laws are pending in Colorado, New York, North Carolina, Pennsylvania and Michigan.

Under the new law, the articles of incorporation of a Benefit Corporation must state that the corporation is being “formed for the purpose of creating general public benefit,” defined as a “material positive impact on society and the environment . . . as assessed against a 3rd-party standard.”

Specific public benefits can include providing low-income or underserved individuals or communities with beneficial products or services; promoting economic opportunity for individuals or communities beyond the creation of jobs in the ordinary course of business; preserving the environment; improving human health; promoting the arts, sciences or advancement of knowledge; increasing the flow of capital to entities with a public benefit purpose; accomplishing any other benefit for society or the environment.

Benefit Corporations will likely be utilized in a variety of industries, including companies that provide food, clothing apparel, office supplies and legal services.

SB 201: The Flexible Purpose Corporation
California is the first state to enact a law authorizing Flexible Purpose Corporations, although Colorado tried and failed to pass similar legislation.

In California, existing corporations and other business entities may merge or convert into a flexible purpose corporation by satisfying certain requirements, including approval of the conversion by a 2/3 vote of shareholders (or a greater vote, if the articles require). The law will also allow flexible purpose corporations to convert into a nonprofit corporation, a corporation, or other domestic business entity upon satisfaction of certain requirements.

Flexible purpose corporations may pursue profit and a “special purpose” at the same time. “Special purposes” include “charitable or public purpose activities that a nonprofit public benefit corporation is authorized to carry out” and “promoting positive short-term or long-term effects of …the flexible purpose corporation’s activities upon” the corporation’s employees, suppliers, customers and creditors or the community and society, or the environment.

Conclusion
These corporate forms join the ever-expanding list of potential structures for pursuing social enterprise in a for-profit context (along with regular corporations, limited liability companies, joint ventures, private-public partnerships and L3C’s). By allowing greater latitude for the establishment of businesses that do not neatly fit into for-profit or nonprofit categories, one hopes these new laws encourage businesses to stay and expand in California.

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