What Is a Benefit Corporation?

A benefit corporation is a legal tool to create a solid foundation for long term mission alignment and value creation. It protects company missions through capital raises and leadership changes. Benefit corporation structure creates more flexibility when evaluating potential sale and liquidity options. It prepares businesses to lead a mission-driven life post-IPO (initial public offering).

Due to law and culture, directors of traditional for-profit companies must maximize the financial returns to shareholders. This single focus is called shareholder primacy. This inflexible legal framework does not accommodate for-profit entities whose mission and impact is central to their business model.

Benefit corporation status allows corporations to opt-out of shareholder primacy and opt-into stakeholder governance. With stakeholder governance, a company is required to take into consideration anyone that is materially affected by that company’s decision-making, like workers, customers, local communities, wider society and the environment.

A benefit corporation is a traditional corporation with modified obligations, committing it to higher standards of purpose, accountability and transparency:

1. Purpose: To create general public benefit. This is defined either as a material positive impact on society and the environment, or as the obligation to operate in a responsible and sustainable manner depending on the state/ province of incorporation.
2. Accountability: Benefit corporations expand the obligations of boards. A board must consider the environmental and social factors, as well as the financial interests of shareholders. This gives directors and officers the legal protection to pursue a mission and consider the impact their business has on society and the environment.
3. Transparency: Benefit corporations must report on their progress to achieve general public benefit. Reporting requirements differ by state/ province, but many are required to use a third party standard to measure their performance and annually report to the public.

For more in-depth discussion of benefit corporations and the legal justifications and the implications for adoption check out the following sources:

• Public Benefit Corporation Guidebook: Discussion of the Delaware Public Benefit Corporation.
• Benefit Corporation Law and Governance: Includes a history and overview of the form as well as analysis of the different laws.
• The Need and Rationale for the Benefit Corporation: Why it is a legal Form that Best Addresses the Needs of Social Entrepreneurs, Investors and Ultimately, the Public: 2013 White Paper that outlines the legal justification for the benefit corporation legislation and discusses the intent behind the legislation.
• Board Playbook: This is the most practical guide to date for companies to adopt Delaware Public Benefit Corporation.

How To Become a Benefit Corporation

Companies can adopt benefit corporation status in any state/ province where legislation has been passed. Existing companies can elect to become benefit corporations by amending their governing documents.

Amendment requires a supportive vote of all shareholders in most states/ provinces. The procedure for filing amendments with the state/ province is the same as any other corporate structures with the addition of a statement that the company is a benefit corporation. A company should consult with a legal representative before taking any action. Below are a few tools to educate companies who are interested in becoming a benefit corporation:

• A general guide to becoming a benefit corporation has been prepared by Faegre Drinker Biddle & Reath LLP. This document answers some of the most common inquiries on incorporation and highlights the key questions a business should consider before becoming a benefit corporation. For a state/ province specific how-to guide please refer to your local Secretary of State (in the U.S.) or seek legal counsel.
• Registered Agent could be helpful as you move through the process of becoming a benefit corporation. A Registered Agent is a document filing specialist but cannot provide legal or accounting advice. They are required by law when you form a company (if you don’t have a physical address in that state/ province) and generally charge an annual fee for services.

A Registered Agent is the liaison between the company and the state/ province in which the company is formed. Their job is to forward any service of process, such as a lawsuit that may be served against the company, and also to pass along any Franchise Tax or annual report notices from the state/ province. Registering Agents familiar with benefit corporations are listed below:

CT Corporation

Harvard Business Services, Inc.

IncNow

How To Create a Benefit Report

All benefit corporations must create a benefit report to meet transparency requirements. (In Delaware it does not need to be released to the public nor does it need to use a third party standard as an assessment tool. It is considered best practice to do both).

These transparency provisions serve to inform the public about the overall social and environmental performance of the benefit corporation. They also serve to inform shareholders and directors so they are better able to meet their duties.

Judges may look to a benefit report, or series of annual benefit reports, to determine if the benefit corporation has met its statutory requirement for its general, and any specifically named, public benefit purpose. The specific logistical and content requirements for benefit reports differ slightly depending on the state/ province. To determine your state/ province’s exact requirements, discuss with legal counsel or reach out to the Secretary of State (in the U.S.).

The information on this page does not constitute legal advice and is provided solely as a reference.

Benefit Report Best Practices

A report should include a description and an assessment of the overall social and environmental performance of the benefit corporation measured against a third-party standard. The third party standard applied should be consistent with that standard in prior benefit reports, or should be accompanied by an explanation of the reasons for any inconsistent application. The description should include:

1. The ways in which the benefit corporation pursued general public benefit during the year and the extent to which general public benefit was created.
2. The ways in which the benefit corporation pursued a specific public benefit that the articles state is the purpose of the benefit corporation to create.
3. Any circumstances that have hindered the creation by the benefit corporation of general public benefit or specific public benefit.
4. The process and rationale for selecting or changing the third-party standard used to prepare the benefit report. If applicable, a statement of any connection between the organization that established the third-party standard, or its directors, officers or material owners, and the benefit corporation or its directors, officers or material shareholders, including any financial or governance relationship which might materially affect the credibility of the use of the third-party standard. More information about the free third party standard created by B Lab called the B Impact Assessment.