Benefit Corporation FAQ

by Matt Dedon 

The following post answers some of the frequently asked questions surrounding Benefit Corporations.

On January 1, 2012, a new law went into effect in California that made it possible to form "Benefit Corporations".  The new law also allows existing corporations to become benefit corporations. 

What is a Benefit Corporation?

A benefit corporation is a corporation that has been formed for the purpose of creating general public benefit.  “General public benefit” has been defined as: a material positive impact on society and the environment.  This public benefit is measured against a third-party standard.  A benefit corporation may also be organized for a specific public benefit, such as:

•           Providing low-income or underserved individuals or communities with beneficial products or services.

•           Promoting economic opportunity for individuals or communities beyond the creation of jobs in the ordinary course of business.

•           Preserving the environment.

•           Improving human health.

•           Promoting the arts, sciences, or advancement of knowledge.

•           Increasing the flow of capital to entities with a public benefit purpose.

•           The accomplishment of any other particular benefit for society or the environment.

What is the “Third-Party Standard” That a Benefit Corporation is Measured Against? 

The “third-party standard” is a standard developed by an entity that has no material financial relationship with the benefit corporation or any of its subsidiaries.  No more than one-third of the members of this entity may be businesses that are held to the third party standard.  The standard used by the entity must be made public and must allow for a public comment period of at least 30 days when developing the standard.

The standard itself must be a comprehensive assessment of the impact of the benefit corporation’s operations upon:

1.         The employees and workforce of the benefit corporation and its subsidiaries and suppliers.

2.         The interests of customers of the benefit corporation as beneficiaries of the general or specific public benefit purposes of the benefit corporation.

3.         Community and societal considerations, including those of any community in which offices or facilities of the benefit corporation or its subsidiaries or suppliers are located.

4.         The local and global environment.

Are There any Requirements for a Benefit Corporation to Satisfy?

Yes.  The directors of a benefit corporation must consider the impact of their actions upon:

1.         The shareholders of the benefit corporation.

2.         The employees and workforce of the benefit corporation and its subsidiaries and suppliers.

3.         The interests of customers of the benefit corporation as beneficiaries of the general or specific public benefit purposes of the benefit corporation.

4.         Community and societal considerations, including those of any community in which offices or facilities of the benefit corporation or its subsidiaries or suppliers are located.

5.         The local and global environment.

6.         The short-term and long-term interests of the benefit corporation, including benefits that may accrue to the benefit corporation from its long-term plans and the possibility that these interests may be best served by retaining control of the benefit corporation rather than selling or transferring control to another entity.

7.         The ability of the benefit corporation to accomplish its general, and any specific, public benefit purpose.

A director of a benefit corporation is not required to give priority to any of the above factors unless that is the specific public benefit the benefit corporation has chosen.

Perhaps most importantly, a benefit corporation must create a business report that sets out how the third-party whose standards they are using was selected, the ways that the company pursued a general or specific public benefit and the extent to which the company was successful, and any circumstances that hindered the creation of a general or specific public benefit.  This business report must be delivered not only to the benefit corporation’s shareholders, but must also post this report on the company’s website, or deliver a business report to any person that requests a copy.

What Happens if a Benefit Corporation Fails to Create a General or Specific Public Benefit?

The directors of a benefit corporation are not personally liable if a benefit corporation fails to bring about the general or specific public purpose for which it was created.  Furthermore, a director of a benefit corporation does not have a fiduciary duty to a person that is a beneficiary of the general or specific public benefit purpose that the corporation has selected in its articles of incorporation.  This allows the benefit corporation to pursue its selected public benefit, without the added hassle of maximizing the profits or benefits of any one party.

Is a Benefit Corporation the Same as a B Corporation?

No.  A “B corporation” is a regular corporation that has been certified by a third-party.  B Lab, a nonprofit entity, certifies corporations that meet certain requirements, such as greater public transparency and higher legal accountability.  While they may hold themselves to higher standards, B corporations must still put the greatest focus towards their shareholders, rather than a public benefit.

Why Were Benefit Corporations Created?

Modern-day corporations are usually run by a board of directors.  These directors must comply with specific obligations- called “fiduciary duties”- to the corporation and to the corporation’s shareholders that own stock in the company.  Courts have long recognized the fiduciary duty that directors in a regular corporation must maximize the profits of shareholders.  Dodge v. Ford, 204 Mich. 459, 507 (1919)

This emphasis towards profit and care for the shareholders may conflict with a corporation that wishes to focus on benefitting the surrounding community and the environment.  Protecting the interests of the public may not always bring in profit and thus, directors would be liable for failing their fiduciary duties to shareholders.

The benefit corporation is an effort to change the bottom line of profit to one of public benefit.  The most important change that is effected by the benefit corporation is that directors no longer have to account to shareholders.  This takes the focus away from monetary profits so the corporation may focus on public benefit goals.  Essentially the fiduciary duty of maximizing shareholder profit has been replaced by requiring the directors to consider non-financial interests when making decisions.

Can an Existing Corporation Become a Benefit Corporation?

Yes.  An existing corporation may become a benefit corporation by amending its articles of incorporation to include a statement that the corporation is a public benefit corporation.  This change must be approved by a member vote of at least two-thirds.

Can a Benefit Corporation Become a Regular Corporation?

If a benefit corporation decides to remove their benefit status, they may amend their articles of incorporation by deleting the language stating that the corporation is a public benefit corporation. This change must be approved by a member vote of at least two-thirds.

Have More Questions?  The ARC Law Group Can Help.

The benefit corporation is an exciting new form of doing business.  ARC Law Group understands that there will be many questions regarding this new type of corporation, and is ready to help.  If you have any further questions, you can contact ARC Law Group at info@arclg.com.

You understand and agree that use of this blog does not in any way create or establish an attorney-client relationship between you and any ARC Law Group attorney. You should recognize that the information provided on this blog is provided for your general information and should not be relied on as legal advice and is not a substitute for direct consultation with an attorney about a specific legal problem.

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