Could, and Should, You Form a Benefit Corporation?

by Deborah Sweeney

Let’s say you own a small bakery that, so far, has only been relatively successful. You’ve also made the decision to use only natural, organic ingredients in making the cakes and pies that you sell, and you donate fifty percent of your profits to breast cancer charities. And now, after being in business for a few years, you want to try and get some investors interested and raise some capital. Normally you would form a corporation, and in doing so you could possibly give up quite a bit of control over how your business operates. After all, your major shareholders may not like the idea of any of the profits going to support charity, or the use of more expensive, natural ingredients.

Luckily for you, and other philanthropically minded business owners, a growing number of states have begun to recognize or are in the process of enacting legislation to recognize Benefit Corporations. Benefit corporations are a new legal structure that allows corporations to raise capital through investment, but also protects a corporation’s officers and directors who forgo maximizing profit so they can continue to pursue a positive, public good, even when doing so cuts into revenue. Now if this sounds exactly like something you would like to form, there are a few questions you should ask yourself before taking the plunge.

Are you willing to adhere to a third-party standard?

Benefit Corporations are legally required to create a positive, material impact on society and the environment. The law varies slightly from state to state, but typically benefit corporations must find a third-party standard that they can use to measure that impact – some groups provide a free assessment service, while others may require payment before accessing their standards. The corporation’s directors must then compile an annual benefit report that is made publicly available and sent out to shareholders. The law neither requires benefit corporations to adhere to any one particular standard, nor does it require any sort of audit, so it is up to you and your shareholders to choose what standard you would like to adopt. It is also important to note that some states also require that an independent ‘benefit director’ prepare a statement analyzing how well a benefit corporation adhered to its mission and social ideals.

Do you think you will be able to attract investors as a Benefit Corporation?

Every market, state, and region is different – there are plenty of places that have investors who are happy to be involved with a corporation that has a social purpose. Back in 2011, the Institutional Shareholder Service compiled a report that found investors are increasingly “incorporating social and environmental considerations” into their voting decisions. But you know the area you live and work in the best, and you know how much time and energy you can afford to put into finding investors. If finding investors willing to put money into your benefit corporation would require you to spend hours and hours driving to multiple cities to pitch your business, then it may not be worth the effort. But do a little research, make some calls, and see if you can find some investors or investment groups that are looking to help businesses that are helping benefit the public good.

Are you committed to your philanthropic ideals?

So far, there is no tax benefit for being a benefit corporation, and typically a benefit corporation’s shareholders, directors, or anyone who owns more than a 5% stake in the company can enact ‘benefit enforcement proceedings’ if a benefit corporation is not adhering to the promises it made in its mission statement. And, as I talked about earlier, benefit corporations have to compile that annual report proving that they are positively impacting the environment and society. So do not undertake this legal structure half-heartedly – it really is only for corporations and owners willing to undergo the extra requirements placed on them, since there really aren’t any external incentives for forming this type of a corporation.

Benefit corporations aren’t for everyone, but are a great new legal structure because they protect owners who want to ensure that their business continues to positively impact the world around them, even after they begin to attract outside capital. You should always consult a lawyer or other professional before choosing a legal structure for your business, but if you are committed to philanthropy, the environment, and your employees, and you live and work in a state that recognizes the structure, it might not be a bad idea to consider forming a benefit corporation