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Sunday, March 22, 2015

“What is a Benefit Corporation? Should I form one?”

By: Matthew J. Moisan

What is a B Corp?

Generally, a benefit corporation (commonly called a B Corp) is a corporate entity type that allows the B Corp’s management to make corporate decisions based not only upon maximizing profits, but upon social and public welfare concerns.

Currently, New York, Delaware, New Jersey, and twenty other states have state law allowing the formation of B Corps. New York provides for B Corps under §1704 of the BCL.

Forming as a B Corp allows the company’s owners to factor public service and philanthropic concerns that have a “public benefit” into their decision-making. “Public benefit” can include a wide variety of categories of socially conscious endeavors, including promoting and preserving environmental protection, physical and mental health and wellbeing, as well as serving disadvantaged individuals and economically depressed communities.

Traditionally, owners and the management of traditional corporations and LLCs are bound to abide by strict fiduciary duties. Their decisions relating to the management of the business are therefore required to be chiefly in the pursuit of corporate profit and increase in share value for the company’s shareholders.

In contrast to traditional corporate structures (S Corps and C Corps), and even limited liability companies (LLCs), B Corps are innovative because they don’t confine their owners to making decisions based upon the company’s profits above all other considerations. 

The ability to make decisions based upon public benefit as well as profits can protect a B Corps and its board of directors from lawsuits by investors and shareholders.

Traditionally, investors and shareholders alike have been able to file suit against a traditional corporation and its management for making decisions that were not in the financial interests of the company. Some of the decisions that can subject a company’s management to liability stem from management’s decisions to use funds for charitable and other causes at the expense of the traditional company’s central purpose of making a profit. But with a New York B Corp, the management’s purpose to support the public interests actually trump the purpose to make a profit.

 

Reporting Requirements

In considering whether to file as a B Corp, you should consider the B Corp’s reporting requirements. B Corp reporting requirements vary from state to state, and thus can potentially have varying impact on a company. New York law mandates that a B Corp file the following information each year with the state: (a) a description of the actions that the B Corp took to pursue the public benefit generally as well as those specifically stated in the B Corp’s formation documents; (b) a description of any facts or developments that prevented the B Corp’s creation or achievement of public benefits; (c) a self-assessment of the B Corp’s performance in trying to achieve a public benefit in comparison to other third party companies in the industry; (d) each B Corp director’s compensation earned as a director of the company; and (e) a list of each shareholder who owns 5% or more of the B Corp’s shares. This report of information has to be sent annually to each shareholder of the B Corp and also posted on the publicly available portion of the B Corp’s website (except for financial and compensation information).

Naturally, for some, these reporting requirements may be onerous. Also, some entrepreneurs and new businesses may not want to disclose this information, including the its basis for making these decisions, publicly.

On the other hand, these reporting requirements may help “even the playing field” by increasing more uniformity in public accountability for socially responsible business practices. You may also, depending upon the success and fame of your company, use these reporting requirements to advertise your company’s corporate responsibility and attract even more clients and business. 

Another practical facet of forming a B Corp, is the consideration of potential investment in the B Corp.  Traditional corporations and LLCs may have an edge in raising capital. For example, under a traditional corporation or LLC, the board of directors and managing members have fiduciary duties that obligate them to maximize the company’s profits on behalf of their shareholders. This central duty helps reassure investors that their investment will see returns more quickly.

However, some investors may worry that B Corp’s ability to factor in public concerns into their day-to-day operations may stall, or even prevent in some cases, future profits. Investors may also be concerned that this decision-making freedom could block a lawsuit against the B Corp to recoup the investment capital.

Ultimately, the decision to form a B Corp over another entity should include consideration of your chief business goals and social concerns, your desire and need to seek additional capital as your business grows, as well as the duties associated with and potential effects that B Corp reporting requirements may impose and have on your company.

If you have any questions relating to B Corps and business entity formation, feel free to contact attorney Matthew J. Moisan at mjm@moisanlegal.com



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