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Choice of Entity:  A Benefit Corporation (or b corp)

As of January 1, 2012, California corporations have a new option for organization under the California Corporations Code: the benefit corporation (or what many refer to as a “b corp”). In a traditional corporation, directors and officers owe a fiduciary duty primarily to the shareholders of the corporation. This standard has had a profound impact on how companies operate and gives those in charge much less choice than they might prefer.  Because of the constraints of this historical legal model, California (along with other states) has created a “benefit corporation”, which obligates directors and officers to consider the social and environmental impact of their actions on “stakeholders,” i.e., employees, consumers and the environment, as well.

A benefit corporation is the term used when a company is created under corporate law and should not be confused with a “B Corp” (with a capital B) which refers to a corporation that is certified by B Lab to meet specific standards for social and environmental performance.

What Are the Benefits of Being a Benefit Corporation?
Incorporating as a benefit corporation legally protects an entrepreneur’s social goals by mandating considerations other than just profit. By giving directors the secured legal protection necessary to consider the interest of all stakeholders, rather than just the shareholders who elected them, benefit corporations can help meet the needs of those interested in having their business help solve social and environmental challenges.

Additionally, many consumers are interested in aligning their purchases with their values.  The benefit corporation status is a great way to differentiate your company from the competition and to attract these customers.

What Are the Drawbacks of Being a Benefit Corporation?
One of the major drawbacks is expanded reporting requirements. The additional reporting requirements are intended to provide shareholders with adequate information to determine if your business is achieving its stated purpose. Each year a benefit corporation must give each shareholder an annual report.

Key to this report is the requirement of a “third party standard” for assessing overall performance, and the process for selecting this third party standard must be explained within the report.  The report must also indicate the efforts made to achieve a general public benefit or the circumstances that hindered that achievement.  Finally, if the benefit corporation has a website, it must post this annual report on its site.

Another potential drawback is uncertainty. Benefit corporations are fairly new legal entities. It is unclear how courts will interpret their mandates to not only seek profits, but also to consider potential benefits to society. Furthermore, the impact on raising capital and how angel investors and venture capitalists will react remains uncertain.

What Are the Basic Attributes of a Benefit Corporation?

  • General Public Benefit: A benefit corporation must have the purpose of creating a “general public benefit”, which is defined as a material positive impact on society and the environment, taken as a whole, as assessed against a third-party standard.
  • Annual Benefit Report: The benefit corporation must prepare and deliver to its shareholders an annual public benefit report.  The report does not need to be certified or audited by a third party but it does need to include an assessment of the overall social and environmental performance of the corporation, prepared in accordance with a third party standard.
  • Corporate Decision Making: Directors of a benefit corporation must consider the impact of any action or proposed action on corporate stakeholders, including employees, customers, the local and global environment and shareholders, as well as community and societal considerations and the ability of the benefit corporation to achieve its purposes.
  • Enforcement: The benefit corporation and its directors and officers may be held accountable for failure to pursue a general public benefit, to issue an annual benefit report and to consider the impact of corporate actions on stakeholders through a “benefit enforcement proceeding.”  Although this proceeding does not permit the recovery of monetary damages, only injunctive relief, the court may award attorneys’ fees and other reasonable expenses incurred by the plaintiff in bringing suit.
  • Supermajority Voting Requirements: Certain corporate decisions affecting the company’s status as a benefit corporation require a vote of at least two-thirds of each class or series of shares in the corporation.  For example, decisions to directly or indirectly terminate benefit corporation status or to dispose of substantially all of the assets of the corporation require this supermajority vote.

How Do You Form a Benefit Corporation?
Forming a California benefit corporation is very similar to forming a regular stock or C corporation but with additional restrictions inserted into the language of the articles of incorporation, the corporate bylaws and the corporate stock certificates.

A benefit corporation does not need to make any reference to its benefit status within its corporate name. Therefore, those considering a benefit corporation don’t need to alter the name they’ve chosen, nor tailor their brainstorming any differently than if they were considering a standard C Corporation.

However, a benefit corporation must state that it is a benefit corporation within its articles of incorporation. Additionally, the benefit corporation may contain within its articles a specific purpose (such as to further the arts, improve public health, etc.), but it is not required to do so.

The benefit corporation’s bylaws should include appropriate provisions from the California corporation’s code regarding the annual benefit report, corporate decision-making, minimum status vote requirements and stock certificates.

Finally, the share certificates of a benefit corporation must specifically state the benefit nature of the corporation.

Conclusion
For entrepreneurs, business owners, workers and consumers, the introduction of the benefit corporation is an exciting development.  Community and environmentally minded business owners can preserve their social goals without sacrificing the ability to make a profit.

Please contact my office at virginia@virgielaw.com or 530-802-0640 if you have questions about the process of becoming a benefit corporation.

Virginia Ryan provides business law services to clients in Northern California, including Auburn, Grass Valley, Nevada City and Truckee.