Care

What is a benefit corporation?

A benefit corporation is a new corporate form allowing for-profit entities to pursue social and environmental goals along with the traditional objective of maximizing profits. The benefit corporation movement grew out of the business community – where social entrepreneurs felt that the traditional corporate forms did not allow them to incorporate their social values into their businesses.

The conventional wisdom has long been that maximizing shareholder value is synonymous with the board’s duty to act in the best interest of the corporation, regardless of the impact of the board’s decisions on employees, the environment, customers or the public in general. The benefit corporation movement questions this fundamental assumption, and in fact, advocates that considering the interests of all stakeholders (by considering profits, people and the planet) is in the best interest of the corporation. Perhaps most important, laws authorizing benefit corporations provide corporate directors and officers protection from shareholder lawsuits if they choose to prioritize people and the environment over profits.

Benefit corporations differ from traditional corporations in three major ways:

  • Purpose:  A benefit corporation must have a purpose of creating a general public benefit, which is defined as having a material positive impact on society and the environment, taken as a whole, from the business and operations of a benefit corporation.
  • Accountability:  When making decisions, members of the board of directors and officers are required to consider the effects of their decisions on shareholders, workers, suppliers, customers, the community and society at large, the local and global environment, and the short and long-term interests of the corporation.
  • Transparency: A benefit corporation is required to annually report on its environmental and social performance using independent third-party standards.

Why become a benefit corporation?

This new corporate form is great for companies that want to incorporate an emphasis on social impact into the core mission of their business.  Directors will not be required to be driven by just the bottom line, but instead will have the freedom to prioritize among profits, environmental concerns and social concerns. If the company scales and becomes an attractive acquisition target, the directors have control over who is deemed to be the right buyer.  Moreover, even after sale, the benefit corporation’s stated social values stay with the business.

Apart from legal protections and operational flexibility, benefit corporation status can itself be a valuable asset adding to the company’s bottom line.  The last decade has seen a rising tide of “conscious consumers,” people who are not solely motivated by low cost, but instead are willing to pay a premium for products that are produced ethically and/or in an environmentally sound manner. Estimated to be 60 million strong in the United States alone, these consumers have powered the success of ethical, environmentally conscious benefit corporations, like Patagonia and Method Products.

Becoming a benefit corporation

If you are starting a new company, you can incorporate as a benefit corporation.  The procedure for incorporation is the same as for a traditional corporation. You must file Articles of Incorporation with the California Secretary of State, which must include the following statement:  “This corporation is a benefit corporation.”

Although not required, if you elect to specify a specific public benefit purpose for the corporation, this should also be listed in your Articles. Under California law, a “specific public benefit” includes the following:

  • Providing low-income or underserved individuals or communities with benefit 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

If you are an existing corporation seeking to become a benefit corporation, you will need to get the vote of two-thirds of all current shareholders to change the organization’s corporate status. You must then file Amended Articles of Incorporation that include the following language: “This corporation is a benefit corporation.” The corporation’s bylaws should also be amended to bring them into conformity with the requirements of the California benefit corporation statute.  Also, if your corporation has previously issued stock certificates, they must be amended to include the following language: “This entity is a benefit corporation organized under Part 13 (commencing with Section 14600) of the California Corporations Code.”  Any shareholders who vote against conversion have the right to require the corporation to purchase their shares at fair market value.

A benefit corporation can revert back to a traditional corporation with a two-thirds vote of all shareholders. Similarly, shareholders who vote against reversion can force the corporation to purchase their shares at fair market value.

For more information, please see:

– Michelle Baker

Michelle Baker is a San Francisco-based attorney interested in social enterprises.

Comments

  1. Michelle,
    Are there any provisions for current Incorporated 501(c)3 entity to change to a social enterprise corporation? Does the state where incorporated have to have specific provisions for social enterprise incorporation, or is this unique to California state law?
    Victoria Miller
    President of an Health Advocacy Nonprofit

  2. Gene Takagi says:

    Charitable assets held by a 501c3 organization are dedicated to the charitable purposes of the organization. Generally, this means if the nonprofit organization converts or merges into a for-profit social enterprise entity, like a benefit corporation, the charitable assets must either (1) be granted to another charity with consistent charitable purposes or (2) be sold for fair market value to the for-profit entity with the proceeds from such sale being granted to another charity with consistent charitable purposes. State laws will dictate the options for converting the nonprofit organization or merging it with a for-profit entity.