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Should Startups Incorporate as Benefit Corporations?

Patagonia.

Kickstarter.

King Arthur Flour.

What do these three companies have in common? They are all Benefit Corporations. Increasingly, companies — particularly startups — are expressing a desire to use their businesses for social good. This desire has given rise to Public Benefit Corporations, a legal incorporation status that embraces a company’s social mission while still enabling them to grow as for-profit businesses.

The first Public Benefit Statute was created in Maryland in 2010. Today, 31 states offer the legal status and almost 4,000 companies have incorporated as public benefit corporations.

 

What is a Benefit Corporation?

A Benefit Corporation is a legal incorporation structure, similar to a LLC, C-Corp, or sole proprietorship. It should not be confused with non-profit status. Benefit Corporations are for-profit companies that choose to balance their financial objectives with the public mission.

Traditional incorporation forms require corporate decisionmaking to be justified in terms of creating shareholder value, commonly understood as prioritizing profit maximization over all else. However, social impact companies understand that commitment to their causes may sometimes conflict with profitability. The Benefit Corporation form provides companies with the legal protection to consider environmental and social factors in business decisions over shareholder value.

Benefit Corporation status only affects corporate governance, purpose, and accountability and does not affect how the company is treated under corporation or tax laws. Benefit Corporations must elect to be taxed as a C corp. or an S corp.

 

How to Become a Benefit Corporation

Becoming a Benefit Corporation is no different from other incorporation processes. To become a Benefit Corporation, companies add language to their charters and articles of incorporation requiring consideration of both shareholders and non-financial interests in business decisions. Non-financial interest can include the environment, the community, customers, etc.

However, because not all states recognize Benefit Corporations, companies must register in one of the thirty-one states which recognizes the form. Slight differences exist from state to state. One of the notable differences is the language necessary to identify the public benefit. Some states only require a general public benefit to be identified in the articles of incorporation, while other states require a specific public benefit.

Finally, most states require an annual report disclosing environmental and social impact. This report must include a third-party assessment of the companies’ impact, and, with the exception of Delaware, these reports must be publically available

 

Is a Benefit Corporation Right for a Startup?

An increasing number of startups, especially those created with a social mission, are attracted to the Benefit Corporation form. However, there are a number of variables entrepreneurs should consider in deciding what is best for their company.

 

Advantages for Startups

  • Performance: Studies suggest that Benefit Corporations perform better in the long run.
  • Consumer Trust: Consumers are more trusting Benefit Corporations after historical incidences of mislabeling and “greenwashing” by corporations. Benefit corporations are seen as more transparent because of the reporting requirement.
  • Investment: Impact investors are particularly attracted to Benefit Corporations, and other types of investors are watching the benefit sector. Investment in Benefit Corporations is predicted to grow as investors have found that social impact is particularly important to the millennial generation. Notably, venture capitalists are showing a willingness to invest in Delaware benefit corporations since the structure is similar to the Delaware C corp.
  • Attracting Talent: Companies are recognizing that social impact is important to attracting millennials as talent.

 

Disadvantages for Startups 

  • Certainty: The general or specific benefit required by law to be identified can be hard to gage making assessment difficult for directors, shareholders, and courts.
  • Legal Uncertainty: Because Benefit Corporations are a new form of incorporation, the law surrounding them is young and developing. The most pressing concern is that it is still unclear how much legal protection the social impact language adds since not all states recognize the form and those that do vary in their understanding of the form.
  • Benefit Enforcement Proceedings: These are proceedings that can be brought by shareholders for failure to follow general public benefit and to compel company to take a certain action. However, to date, no company has been subject to such a proceeding. Additionally, unless stated in bylaws, boards of directors and the company are not liable for monetary damages if the company fails to carry out mission under benefit corporation status
  • Profit Margins: Committing to a Benefit Corporation status does pose a threat to near-term profit which may trouble potential investors. Thinner margins may result in committing to social good. Entrepreneurs should be prepared to manage investors’ expectations and be able to communicate why thinner margins in the near-term are a smarter business decision in the long-term.

 

The Difference between Benefit Corporation and a Certified B-Corp

Registering as a Benefit Corporation should not be confused with attaining B-Corp certification.

“Certified B Corporation” is a third-party status administered by the non-profit B-Lab. It’s like the “fair trade” label you may see on your bag of coffee. B-Lab independently assesses companies based on a B Impact Assessment, which looks as a company’s social and environmental impact in relation to a variety of metrics. B-Lab awards the B-Corp certification to companies who receive an appropriate score.

B-Corp status brings additional credibility to social impact companies. Many Benefit Corporations also have B-corp certification, but it is not necessary to attain the certification to function as a Benefit Corporation. However, if companies that are not Benefit Corporation wish to attain B-Corps certification, and if they are incorporated in a state that recognizes Benefit Corporations, B-Corps certification requires that they incorporate as a Benefit Corporation within 2 years of attaining the certification.

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