By: Samantha Gross
March 2017
Patagonia, Etsy, TOMS Shoes, and Warby Parker are just a few companies out of a growing number to join the benefit corporation movement. Entrepreneurs and corporate management of this relatively new legal status can pursue for-profit ventures, while also committing their business to a specific public benefit. Perhaps, the popularity of the benefit corporation resulted from frustration with the historic premise of corporate law, which established that a corporation’s sole purpose is to maximize shareholder profits. This movement away from shareholder primacy begs the question, is the benefit corporation the entity of the future?
Why are Benefit Corporations so Revolutionary?
Although benefit corporations have gained popularity, it has been slow over the last seven years. American corporate law is centered around the theory of shareholder primacy, which mandates that a corporation honor its fiduciary duty or face legal liability. In other words, corporate directors and officers have less discretion in determining the goals of the company, especially when at odds with generating shareholder profits. In the landmark case of Dodge v. Ford, the court ruled that Henry Ford must operate in the interest of the corporation’s shareholders, not in a charitable manner for the benefit of employees and customers. Entrepreneurs and members of corporate governance, who believe in corporate social responsibility, have long disagreed with such shareholder primacy mandates. But the tables are turning. Currently, thirty-one states have passed legislation permitting the formation of benefit corporations and seven more states are in the process.
What is the Difference Between a B Corporation and a Benefit Corporation?
Before delving into the nuances of a benefit corporation, it is important from a legal perspective to distinguish the benefit corporation from the B corporation. A benefit corporation is a legal status, a formal business structure like a LLC or a C corporation. Requirements for forming a benefit corporation vary from state to state. In general the business must file articles of incorporation with the state defining a specific social benefit, and is subsequently subject to auditing in order to ensure that the company is working towards the intended social benefit. Traditional corporations, which decide to become benefit corporations, can amend their by laws. Conversely, a B corporation is a status conferred by B Lab, a nonprofit created to award for-profit businesses that meet certification standards for overall social and environmental performance.
Benefit corporations and B corporations require the same accountability and transparency, which include public reports of the company’s overall social and environmental performance assessed against a third party standard. However, performance for benefit corporations is self-reported, whereas B corporations must achieve a minimum verified score every two years by the B Impact Assessment. Additionally, B corporations are available to every business regardless of corporate structure or state of incorporation. The formal legal structure of benefit corporations is not yet available statewide.
Lastly, B Lab certification can come at a hefty price, ranging from $500 to $50,000 a year based on the company’s revenues. State filing fees for benefit corporations are a little more modest ranging from $70 to $200.
For companies who already have a formal business structure, the B corporation certification is a more likely option, offering access to the B Lab and B corporation logo. However, for those companies whose primary goal is to benefit social or environmental concerns, the legal status of a benefit corporation seems more practical especially as states continue to pass benefit corporation legislation.
What are the Advantages and Disadvantages of Becoming a Benefit Corporation?
As James Surowiecki notes in The New Yorker, “[i]t’s what behavioral economists call a ‘commitment device’—a way of insuring that you’ll live up to your promises.” By giving directors legal protection to consider the interests of all stakeholders, not just the shareholders, benefit corporations gain entrepreneurial and investor flexibility. Current trends suggest that consumer demand for corporate accountability is rising. Thus, businesses with benefit corporation status may obtain a competitive advantage by banking on consumers, who would rather purchase from a company that shares similar social values. Moreover, employee confidence in a company that is legally committed to benefiting more than just its shareholders may produce more efficient and successful results.
Nevertheless, several disadvantages come with this futuristic entity structure. One is expanded reporting requirements, including an annual report to the shareholders and public. These reporting requirements place particular pressures to ensure that the business is actually providing the specific public benefit it set out in its mission. Another potential downside is that benefit corporations are fairly new legal entities, and the law is still uncertain on how these entities will be regulated. Moreover, legislation for benefit corporations varies from state to state.
Another key aspect for entrepreneurs and investors to consider is that benefit corporations, unlike nonprofit organizations, are not tax deductible. Thus, many expenses that exist for a traditional corporation also carry to benefit corporations.
How Great is the Potential for Benefit Corporations?
We all remember the failures of BP, Enron, and Lehman Brothers. Perhaps, if these companies had established a mission to benefit social or environmental issues from the moment of incorporation, the resulting public harms would have been less likely. With current social movements, there is certainly a push for corporate social responsibility, rather than waste and greed. With traditional American corporate law finding that corporate social responsibility is secondary to maximizing shareholder profits, it will be interesting to see how legal precedent develops for benefit corporations. Supporters of existing corporate law claim that not much will change. However, economic theorists have found that analyzing performance through profits have deprived businesses of judging other performance indicators. Benefit corporations have the ability to enhance their competitive strategy by incorporating social values. So far, some of consumers’ favorite companies like Patagonia, Warby Parker, and Etsy are producing popular products, reaping profits, and simultaneously giving back to society in charitable fashion.