September 13, 2024
One of the most frequent early-stage questions from entrepreneurs is whether they should organize their business as a traditional business entity—such as a corporation—or as one of the newer, alternative entities—such as a benefit corporation (distinct from the “B Corporation” certification offered by the Pennsylvania-based nonprofit B-Labs)—that many socially responsible businesses are increasingly using in recent years. While there is no one right answer to this question, there are some key considerations that should help entrepreneurs decide on how they want to proceed.
A benefit corporation is a for-profit corporation, like Warby Parker or Ben & Jerry’s, that seeks to produce a positive effect upon persons, entities, communities, or interests through one or more specific benefit purposes (e.g., the public benefit typically includes some sort of artistic, charitable, cultural, economic, educational, environmental, literary, medical, religious, scientific, or technological purpose) as set forth in the company’s certificate of incorporation. By embedding it side-by-side with the company’s for-profit purpose in the company’s charter, the Delaware statute requires benefit corporations to balance their for-profit interests with the best interests of those that their public benefit is intended to help. This is in contrast to traditional corporations, which do not require (and typically do not have) a specific benefit purpose in their organizing documents, meaning that traditional corporate boards are not required (and in many instances are not permitted to) weigh any interests other than the pure financial interests of shareholders when making decisions for the corporation. In many cases, this means a choice between maximizing profits for the benefit of stockholders or facing a potential lawsuit for not doing so.
To enforce this multi-bottom line mandate, the Delaware benefit corporation statute provides for two primary enforcement mechanisms: (i) the ability of stockholders who hold at least 2% of the company to bring suit against a board of directors (called a benefit proceeding) in order to compel the board to more fully weigh its beneficial purpose, and (ii) the requirement that the company publish and post a report to its website showing its progress in accomplishing its beneficial purposes. While it is unclear what the exact consequences are for violating those provisions, for now these mechanisms seem to serve primarily as an organizing feature and behavioral anchoring mechanism rather than as a separate and distinct threat not already faced by traditional corporations.
While not appropriate for every business or situation, entrepreneurs choose to form benefit corporations for myriad reasons:
- Brand loyalty. A company that is formed as a benefit corporation can advertise its status in both its name and its marketing materials. Numerous studies have shown that consumers are more likely to buy products and services from companies that market themselves as being socially responsible, and advertising itself as a benefit corporation is one way a company can show its commitment to the public.
- Accountability. By actually providing mechanisms through which shareholders and the public can hold directors and the company responsible for its stated public purpose, benefit corporations have the ability to influence and change behavior for the better (even if these enforcement mechanisms are largely untested in a legal context). This type of accountability is why many companies decide to incorporate as a benefit corporation—so they can not only talk the talk, but they can also walk the walk.
- New sources of funding. In addition to obtaining capital from traditional sources, many private foundations (including such large foundations like the Ford Foundation and the Kresge Foundation) are able to make debt or equity investments called “Program-Related Investments” or “PRIs” in benefit corporations if the benefit corporation’s public purpose is aligned with the foundation’s charitable purpose. In addition to being another source of capital not generally available to traditional corporations, PRIs are often made on better-than-market terms in order to satisfy some of the IRS rules governing PRIs for private foundations.
The full article can be found here. The article was originally published on ImpactPHL. ImpactPHL is a nonprofit dedicated to growing the impact-investing ecosystem to harmonize financial returns and social impact returns in the Greater Philadelphia region.
Matt Devine (LAW ’16) is an associate at Royer Cooper Cohen Braunfeld (RCCB) where he focuses his practice on the representation of entrepreneurs and businesses in a variety of corporate and commercial matters. He is also an adjunct professor at Temple Law School.