Benefit Corporations: What You Need to Know

Benefit Corporations: What You Need to Know

One of the never-ending sources of confusion regarding B Corps is the difference between being a Certified B Corp and becoming a Benefit Corporation. Getting certified as a B Corp involves getting a minimum score of 80 on the B Impact Assessment and meeting other requirements; when you’ve done that, your business is considered a Certified B Corporation that meets the highest standards of social and environmental responsibility.

However, becoming a Benefit Corporation is different: that is a legal designation and you need to work with a good attorney to get that set up. Since I’m not an attorney, I reached out to Kevin Christopher at Rockridge Venture Law, a Certified B Corp in Tennessee. Kevin and his team put together a great infographic, which you can see below, and also answered some common questions that come up for business owners considering making this change.

Benefit Corporation Infographic

How would you describe what a Benefit Corporation is and why it’s important?

A Benefit Corporation may be thought of as a legal framework to best promote corporate social responsibility. Over the past few decades, U.S. corporate law has trended towards something lawyers ominously refer to as the doctrine of shareholder primacy. It basically means that shareholders can pressure a company into maximizing monetary return to those investors over competing considerations like environmental and social impact.

For example, a company could be prevented from rolling out a novel paternity leave program for its employees if by doing so the company were to risk shareholder dividends. By organizing and operating as benefit corporations, companies can shield their management activities from shareholder pressures; effectively, Benefit Corporations put the force of law behind the idea that a company can and will consider people, planet, and profit as worthy metrics of success. [*Note that we will use “company” in our answers when referring to you or your entity since benefit corporation regulations extend in some states to partnership structures as well as corporations.]

If a company is already set up as a C Corp or an S Corp, what will change if it becomes a Benefit Corporation?

A few things: for instance, in Delaware, to become a Public Benefit Corporation, an already existing C or S Corp must:

  1. Add “Public Benefit Corporation” “PBC” or “P.B.C” to its name
  2. Identify one or more specific public benefits in its Certificate of Incorporation approved by both the board of directors and stockholders of the corporation
  3. Amend stock certificates to state “Public Benefit Corporation.”

Once effective, directors have a duty to consider in board actions not only stockholder interest but also the stated public benefit(s) and all other stakeholders in the company.

What is involved in the process to become a Benefit Corporation? How long does it take and how much does it cost (not including legal fees)? 

If you’re already incorporated as a C or S Corp, then the administrative filing costs will be the required amendments to your company’s incorporation documents. If you have yet to incorporate, then the filing costs will be the same as incorporating as a C or S Corp in your state.

If your state has not adopted benefit corporation legislation, or has adopted a watered down version of them (think double-bottom-line vs triple-bottom-line), then you may want to consider incorporating outside of your state. The amount of time involved will largely depend upon your corporate governance structure and how much time is necessary for board-level adoption of the new structure.

What are the ongoing requirements and fees needed to retain Benefit Corporation status?

Most states require that a company submit a benefit report annually or biannually; this is one way of keeping companies focused on the triple-bottom-line approach to measuring success. Some states require the update to be published publicly and others allow the company to choose. Also, some states require that the company provide notice of its status as a benefit corporation before the sale of stock.

Of course, the company will need to operate in accordance with its newly stated corporate, environmental and social mission, and clearly document their social and environmental practices. Otherwise, the company should comply with corporate formalities as usual.

How does becoming a Benefit Corporation affect your taxes? Are they taxed differently?

Benefit corporations are not tax-exempt, like non-profits, because they are still for-profit entities. A benefit corporation will still be taxed as an S or C Corp, or alternative pass-through entity where applicable. Benefit corporation status is first and foremost a legal status.

Notwithstanding, in some circumstances, for instance with pass-through entities, expenditures historically not deductible as not related to the primary business of the company may become deductible through benefit corporation adoption.

For instance, if a law firm partnership properly organized wished to purchase kayaks for monthly river cleanups (just brainstorming here, of course), that purchase may ordinarily be considered personal expenditures attributable to its partners or not reasonably related to the practice of law; as a benefit corporation, the law firm may reasonably argue that the purchase is a proper business expenditure in light of the firm’s triple-bottom-line business model and specific corporate structure.

The I.R.S. in its rulemaking is concerned with the creation of wealth, and if new markets are created or competitive advantages achieved through investments specific to differentiating branding, i.e. promotion of benefit corporation status to appeal to conscientious consumers, then a secondary if not parallel aspect of the company’s business purpose has been achieved and should be recognized equivalent with other primary business expenses.  

Are there any challenges that you’ve seen businesses encounter in meeting this legal requirement? How have they overcome them?

The legal requirement for being registered as a benefit corporation can be pretty straightforward, accomplished through a simple articles or charter statement invoking the relevant company’s state statute. That being said, in most if not all cases the state offices issuing registrations are merely processing offices; if you have checked the box, you fit into the bucket.

The more important question is: how does a benefit company maintain its integrity over time? If the need ever arises to assert benefit company protections, e.g. against a derivative suit or merger, then very likely the company will need to demonstrate that directors and officers are apprised of benefit status and meaning, and that decision making has consistently been guided by triple bottom line considerations. Experienced counsel can assist with a corporate compliance program that endures through leadership changes and scaling.  

Is there anything else that business owners should be aware of if they switch their business over to become a Benefit Corporation?

We encounter regular confusion around the differentiation between a benefit corporation and Certified B Corp. We’ll offer our firm as an example. Rockridge Venture Law is organized as a Tennessee Professional Limited Liability Company. Tennessee has a social purpose statute, which is a less comprehensive version of Delaware’s model benefit corporation statute, and has not yet passed any LLC specific benefit legislation. Nevertheless, we have adopted language in our articles of organization and operating agreement fully committing our firm to triple-bottom-line management and performance obligations. Now, irrespective of the fact that Tennessee has adopted what could be considered benefit-corporation-lite statutes, our firm qualifies for B Corp status and is in fact a Certified B Corp.

Do you still have questions about Benefit Corporations or getting certified as a B Corp? If so, please fill out the form below and we’ll get back to you.