Benefit Corporations:

Making Profits + Positive Impacts

By Sandra B. Feldman, Publications Attorney for CT

What is a Benefit Corporation?

For-Profit Social Purpose Benefit Corporation

An incorporated entity that can earn and distribute profits like a for-profit corporation and have a charitable or socially beneficial purpose like a nonprofit corporation

Benefit corporations are based on idea that corporations can be governed not only for their shareholders’ best interests but for the best interests of their employees, customers, communities, and society too

Benefit Corporations Address the Needs of Social Entrepreneurs

Doesn’t want to use a for-profit corporation because directors are expected to maximize shareholder value and may be liable for making decisions favoring interests of non-shareholders

Doesn’t want to use a nonprofit corporation because it cannot distribute income to shareholders

Social EntrepreneurIs an entrepreneur who wants to earn a profit and benefit society

The Benefit Corporation StatutesA benefit corporation can only be formed in a state that has passed a statute authorizing its formation

Maryland was first state to enact a Benefit Corporation law (2010)

As of 4/15/2015, 29 states plus the District of Columbia authorize benefit corporations. Most statutes are based on a Model Benefit Corporation Act (“Model Act”)

The “Model Act” was drafted by B Lab – a nonprofit organization that is a leading advocate of the benefit corporation business entity type

Delaware enacted a Public Benefit Corporation Law, that differs in several ways from the Model Act

For information on CT’s Professional Benefit Corporation Services, visithttps://ct.wolterskluwer.com/benefit-corporation

Forming a New Benefit Corporation

- Benefit corporation is incorporated in same manner as a traditional for-profit corporation

- Articles of incorporation must state that it is a benefit corporation

- File articles of incorporation with Secretary of State

- In some states the name must include the term “benefit corporation”, or an abbreviation thereof

- Subject to same compliance requirements of general corporation law except where statute expressly provides otherwise

Must appoint and maintain a registered agent and office Name must be distinguishable from other companies’ name Must file documents to effect mergers, change of name, dissolution, etc.

Converting to a Benefit Corporation

If you already formed a regular corporation,you can convert it into a benefit corporation in two ways:

Shareholders must approve amendment or merger by – in most states –a two-thirds vote

- Supermajority intended to ensure broad shareholder support for decision

By merging it into an existing benefit corporation

By amending its articles of incorporation to add statement that it is a benefit corporation

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Benefit CorporationVS

Traditional For-Profit Corporation

Corporate Purposes Director Duties Annual Reporting

Benefit corporation differs from a traditional for-profit in three main areas

Corporate Purposes

General Public Benefit

-Every benefit corporation has a purpose of creating a general public benefit

Is defined in most states as a “material positive impact on society and the environment, taken as a whole, assessed againsta third party standard, from the business and operations of the benefit corporation”

-May also have one or more specific public benefits

Must be set forth in articles of incorporation. Examples include:

Providing beneficial products or services to low-income or underserved individuals or communitiesImproving human healthPromoting the arts, sciences or advancement of knowledge

-May have any other lawful purpose a traditional corporation can have

Directors’ Duties- Directors, in discharging their duties, must consider the effects of any action or inaction upon:

-Directors may consider other factors or the interests of other groups that they consider appropriate

Shareholders

Employees

Customers

Community and societal factors

Local and global environmental interests

Corporation’s short and long term interests

Corporation’s ability to accomplish its general and specific benefits

Annual Benefit Report- Benefit corporation must prepare annual benefit report including:

Description of ways corporation pursued a general public

benefit and any specific public benefit

Extent to which benefits were created

Circumstances hindering creation

Assessment of its overall social and environmental performance measured

against a third party standard

Process and rationale for selecting third party standard

If it appoints a benefit director, his or her name and contact information

and a compliance statement

Compensation paid to each director

Statement of any connection between organization that established

third party standard and the benefit corporation

Annual Benefit ReportPurpose of Report

Provide shareholders with information so they can evaluate benefit corporation’s performance in creating a public benefit and judge whether directors have discharged their responsibilities

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2-Reduce “green washing” – phenomenon where company falsely claims to beenvironmentally and socially responsible

-Most states provide that the report must be sent to each shareholder within 120 days after end of fiscal year or at time benefit corporation delivers any other annual reports to shareholders

-Benefit corporation must post report on public portion of website

-Some states also require delivery to Secretary of State

Delaware’s Public Benefit Corporation Law

158 benefit corporations were formed in first year

Went into effect August 1, 2013

Delaware’s Public Benefit Corporation Law

Differs from benefit corporation law found in most states in several respects:

At least 90% of existing Delaware corporation’s shareholders must approve

transition to public benefit corporation (PBC) status by amendment or merger

Name must contain “Public Benefit Corporation”, “P.B.C.”, or “PBC”

Required to identify specific public benefit in PBC’s certificate of incorporation

Directors required to balance certain interests

Benefit report:

Only required every other year

Does not have to be made public

Third party standard for measuring performance not required

Thank you

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