Private Client Services Update – Benefit Corporations – A New Business Entity for the Socially Minded Entrepreneur

    By David Kamer, Estate, Trust & Wealth Transfer

    Social Entrepreneurship has become a hot concept in recent years as many businesses and entrepreneurs have sought to bring profit-making and social mission together under one roof. This is reflected in the growth of businesses incorporating social impact into their business model – from purveyors of Fair Trade certified goods, and sellers of organic, sustainably grown and environmentally friendly foods and products, to microlenders, film studios, specialized venture capital firms, and even law firms. A new platform has been developed to propel this phenomenon forward – the benefit corporation—and, effective July 1, 2011, Virginia jumped on the bandwagon as an early adopter with enactment of new Article 22 of Title 13.1 of the Code of Virginia.

    Charitable, non-profit corporations (IRC § 501(c)(3) organizations established as nonstock corporations) are organized and operated exclusively for charitable, educational, religious and/or scientific purposes. They do not have shareholders and cannot benefit insiders or other private parties. In contrast, traditional for-profit corporations have shareholders and they are obligated to maximize profits or share value for the benefit of those shareholders.

    Benefit corporations are intended to bridge this gap by allowing socially minded entrepreneurs to enjoy the fruits of their labor without being liable to shareholders for failing to be sufficiently profit driven and bottom-line oriented.

    Under the new Virginia law, a company may either incorporate as a benefit corporation or elect to become one if it receives approval from all voting shareholders. The articles of incorporation must state that the company is a benefit corporation. At a minimum, the purpose of a benefit corporation must be to create a general public benefit – defined as a material positive impact on society and the environment taken as a whole, as measured by a third-party standard, from the business and operations of the corporation. The corporation may also have as its purpose the creation of other specific public benefits—defined as benefits that serve one or more public welfare, religious, charitable, scientific, literary, or educational purposes, or other benefits beyond the strict interest of the shareholders. Examples of such specific public benefits include the provision of “beneficial” products or services to low-income or underserved individuals and communities, promoting economic opportunity for individuals or communities beyond job creation in the normal course of business, preserving or improving the environment, improving human health, and promoting the arts, sciences, or advancement of knowledge.

    A benefit corporation must prepare, and disclose to its shareholders and the public, an annual “benefit report” that (i) describes the ways in which the corporation pursued the general public benefit, and any specific public benefits, during the year, the extent to which such benefits were created, and circumstances that hindered the creation of such benefits, and (ii) includes an assessment of the social and environmental performance of the corporation, prepared in accordance with a third-party standard adopted by the corporation. Currently, the leading (and perhaps only) independent third party offering such standards and assessments (for a fee) is B Lab, a Pennsylvania-based company that is also the leader in lobbying for the enactment of benefit corporation laws.

    Perhaps the most striking breaks from the law governing traditional stock corporations are the provisions of the benefit corporation law that reorient the focus and fiduciary duties of directors and officers. Traditionally, directors and officers must act in the best interests of the corporation and its shareholders. For benefit corporations, however, the creation of a general public benefit, and any adopted specific public benefits, is deemed to be in the best interests of the corporation. Furthermore, the Code provides that in discharging their duties and taking corporate action, the directors must consider (aside from the effect on the shareholders), the effect on (i) the corporation’s employees, subsidiaries and suppliers, (ii) the interests of customers as beneficiaries of the public benefit purposes of the corporation, (iii) community and societal considerations (including those of each community in which offices or facilities of the corporation, its subsidiaries, or suppliers are located), (iv) the local and global environment, (v) the short term and long term interests of the corporation (including that the interests of the corporation and the public benefit purposes may best be served by the continued independence of the corporation), and (vi) the ability of the corporation to accomplish its public benefit purposes. The Code specifically provides that consideration of the foregoing interests and factors shall not constitute a conflict of interest nor a breach of a director’s duty to act in accordance with his or her good faith business judgment of the best interests of the corporation.

    The primary advantage of benefit corporation status is that a business or entrepreneur interested in incorporating social benefits into its business model and mission can have its cake and eat it too – capital markets can be accessed and returns provided to investors, without having to focus primarily on maximizing profits. In the future, such status may make a difference to consumers, just as the organic label does for food and other products.

    A classic example of a company that might have benefited from benefit corporation status is Ben & Jerry’s Ice Cream. When Unilever offered to buy the company, its founders opposed the sale out of concern that Unilever would dilute or eliminate the social mission that was a part of the company’s business model. However, since Unilever was the highest bidder, by a substantial margin, the directors were fearful of shareholder lawsuits if a lower bid from a more aligned buyer was accepted, so the company was sold to Unilever. If Ben & Jerry’s had been a benefit corporation, its directors could have selected a buyer more clearly committed to its social mission, even at a lower purchase price.

    Some commentators have raised concerns about benefit corporation status. If a poor, purely business, decision is made, directors may be able to hide behind social benefit considerations to avoid liability. Also, while the directors may have more freedom with respect to shareholders, they may be more encumbered than directors of traditional corporations by the larger universe of obligations. For example, in taking corporate actions, directors of benefit corporations must consider the local community and its employees – this could restrict a company’s ability to relocate, or its ability to implement layoffs.

    Ultimately, benefit corporation status can be the right fit for the right business or the right owner. But the extent to which such status is embraced by the business community and the marketplace, rather than being treated as an oddity, remains to be seen.

    David Kamer is a partner in the firm’s Norfolk office. David advises a wide array of non-profit organizations on tax, compliance, governance and operational matters. He also maintains a trusts & estates practice with particular focus on charitable giving and planning for professionals and executives.

    The contents of this publication are intended for general information only and should not be construed as legal advice or a legal opinion on specific facts and circumstances. Copyright 2024.