Certain preconceptions of corporations follow the historical belief that corporations exist solely to maximize profits for shareholders. As such, a profit mandate gives those in charge much less of a choice than they might prefer. With the advent of businesses moving to a social awareness business model, this has put constraints on the traditional corporate legal model. So, what if a corporation was able to seek profits while also considering their potential benefit (or detriment) to society? The answer in most states has been the adoption of benefit corporations (“B-Corp”). During the summer of 2015, Indiana passed legislation to join those states allowing the registration of B-Corps. As of the fall of 2015, there are thirty states that have enacted legislation allowing for this particular type of entity.
So, what’s the difference between a traditional corporation and a B-Corp?
The main difference is that a B-Corp must take into consideration the general public benefit of its actions as opposed to just the financial considerations. So, what does this mean? The “general public benefit” has been defined by the legislature as “the material positive impact on society and the environment, taken as a whole, assessed against a third party standard, from the business and operations of a benefit corporation.”
In addition to requiring the B-Corp to take into additional considerations when making decisions for the company, the legislature has put forth other requirements for the shareholders of a B-Corp, including the placement of an independent benefit director and an annual benefit report that must be sent to all shareholders.
The independent benefit director must be an individual who is independent of the corporation. In order for an individual to be independent of the corporation they must have not been an employee, benefit officer, family member, or own five percent or more of the outstanding shares of the B-Corp. The independent benefit director is responsible for creating a report of the benefit director for the annual benefit report that must be sent to all shareholders. The independent benefit director’s report must contemplate whether the benefit corporation, officers and directors have acted in accordance with its general public benefit purpose.
Moreover, the B-Corp must prepare and send an annual benefit report to all shareholders. The annual benefit report must include a list of statutory requirements that are set forth in Ind. Code § 23-1.3-10-1, including an assessment of the overall social and environmental performance of the benefit corporation, the name of the benefit director and benefit officer, the report of the benefit director, and any circumstances that have hindered the benefit corporation from reaching its specific public benefit. The annual benefit report must then be sent to each shareholder on the earlier of the day that is one hundred and twenty days prior to the end of the B-Corp’s fiscal year or the same date the B-Corp delivers other annual reports to the shareholders.
With the additional red tape, what is the “benefit” of being a B-Corp?
In a B-Corp, the directors of the company have the legal protection necessary to consider all stakeholders rather than just the shareholders who elect them, providing the directors and officers a safe haven to pursue the challenges they face on their social agenda. The corporation is able to act in the best interest of the B-Corp by making decisions based on the effects to:
- the shareholders,
- employees of the benefit corporation and its subsidiaries,
- the local and global environment,
- the B-Corp’s short and long term interests,
- the B-Corp’s ability to accomplish their general or specific benefit purpose, and other community and societal factors.
Therefore, the directors and officers of the company have a statutory duty to act on behalf of those factors rather than just take them into consideration (as in a traditional corporation see IC § 23-1-35-1(d)).
Outside of the legal protection a B-Corp’s principals may receive, there is also a potential for positive impact based on their ability to differentiate the company from competition in the marketplace. Consumers may view a B-Corp as one that is ahead of the times and willing to take a stand on social issues. Additionally, this may allow a B-Corp to include a price premium on its products.
From a start-up’s prospective
The selection of a B-Corp can be beneficial to an early-stage start-up for a number of reasons. The first being that the entity may be worried about potential investors placing additional pressure to perform financially. This may cause a start-up to dump some of their initial goals to be a game changer in a particular social or environmental challenge. By initially forming as a B-Corp, an entity has the legal protection to stick to their initial motivations for beginning their start-up in the first place. In addition, being a B-Corp can be used as a potential marketing tool in the marketplace. Consumers may find it more appealing to purchase goods or items from a company that affirmatively has a social conscious and purpose.
Alternately, there are quite a few reasons why a B-Corp may not be the correct entity selection for you. One of the major drawbacks is the extensive reporting that is required. As stated earlier, by becoming a B-Corp the company is required to send an annual benefit report to all of its shareholders. While there are currently not any tests or factors providing for the sufficiency of such a report, there is a basic list of information that the legislature states must be included in the report. This could be cumbersome for a start-up that is early on in its development cycle. Early on in your start-up you may have another job, or other pesky tasks that are pulling you away from focusing on your product or invention, and additional paperwork will only pull you further away from honing in on your craft.
Additionally, potential investors may look at your entity selection unfavorably and ask you to convert to a traditional corporation prior to receiving any investment from them. This is due, in part, to investors’ lack of familiarity and an established comfort level with the B-Corp’s legal structure and would rather not deal with the extra hassle.
Selecting an entity early on is very important. It’s crucial to weigh the benefits and detriments of being a benefit corporation early on in your business life cycle.
ABOUT THE AUTHOR – CORBEN LEE
Corben Lee is an attorney at Gutwein Law. Prior to receiving his J.D. from the University of Notre Dame, he earned a BS in Management from Purdue University's Krannert School of Management. He focuses primarily on business law.