Benefit Corporations: What Are the Advantages, Disadvantages, and Impact on Not-for-Profit Organizations?

Fourth Quarter - 2014

Benefit corporation legislation has been enacted in 27 states with the original legislation first appearing in Maryland in 2010. Most recently, Connecticut's law became effective in October 2014. What has been the impetus behind the addition of the benefit corporation legislation? While a traditional for-profit corporation's sole purpose is to maximize shareholder profits, a benefit corporation may pursue socially-minded purposes as one of their corporate objectives. Therefore, incorporating as a benefit corporation legally protects a company's social goals by mandating considerations other than profit, allowing the business to align with and address altruistic commitments. 

The Origin and Advantages of a Benefit Corporation Identity

A traditional business exists solely to maximize profit, while a non-profit uses revenue to achieve goals rather than increase profit. How can the ability to seek profits while also considering the potential benefits to society effectively combine? Benefit corporations fulfill such a need.

A benefit corporation differs from a typical for-profit corporation by allowing the entity to consider how it can provide a greater good for the public, otherwise known as a public benefit. An advantage of benefit corporation legislation is that it allows the entity more freedom to provide a benefit to society by not being required to have a single goal of maximizing the profit of its shareholders. Although these companies still strive to make profits to continue their business, this legislation allows them to consider society's needs as well as the needs of their employees in conjunction with the desire to make a profit. The benefit is that this change in corporate purpose allows entrepreneurs and investors to promote social interests while still generating an investment return. 

Legislation for benefit corporations varies from state to state. Generally, these corporations must provide a "specific public benefit" as defined in the state's legislation. Such interests can include bettering the environment or reducing poverty. These entities provide an avenue for corporations that want to pursue investment dollars to forward their societal interests. 

The Potential Disadvantages of a Benefit Corporation Identity

Expanded reporting requirements are a significant drawback to operating a benefit corporation. Transparency is an important aspect for a benefit corporation, and an annual report to the shareholders and the public is required. Included in this report is the Corporate Director's opinion on whether the benefit corporation operated within its specific purpose and if it did not, the reasons why.

A comparison of the entity's performance in providing a public benefit to a third party standard may also be required. This report will allow both the shareholders and the public to determine if the company is meeting the requirements of providing a public benefit. However, only the governing body and shareholders may bring action against the company for a perception that the company is not providing a public benefit. 

Another potential drawback is that as benefit corporations are fairly new legal entities, uncertainty lies in how courts will interpret mandates that seek to increase profit and the greater societal good. Furthermore, benefit corporations are state-regulated, as each state that has adopted benefit corporation statutes or another hybrid entity may have unique requirements specific to transparency, revocation, legacy preservation, or other provisions. This creates new and potentially ambiguous territory to navigate.

The Difference between a Not-for-Profit Organization and a Benefit Corporation

To be clear, benefit corporations are not not-for-profit organizations, and any investments made in benefit corporations are not tax deductible. The benefit corporation is a new type of entity that allows companies to be socially responsible while still generating profits. Corporations that have adopted this model include King Arthur Flour Company, whose corporate mission is environmental sustainability, and Patagonia, a company working to promote safe, fair, legal and humane working conditions.

The Potential Impact on Not-for-Profit Organizations

While there is concern that benefit corporations will impact contributions to traditional not-for-profit organizations, those that are looking for a tax deductible contribution will continue to invest in traditional not-for-profits. Additionally, benefit corporations can make contributions to other not-for-profits in order to further their goals as a company as well as provide funding to current not-for-profits.  However, only time will tell if these entities will divert charitable giving away from the traditional not-for-profit.

What Does CohnReznick Think?

For those that would like their current business to expand its efforts within the social investing arena, or those thinking of starting a new business with social investing as part of its purpose, the benefit corporation structure may be the right place to start. It is important to weigh the benefits and costs of this type of entity to make sure it is appropriate for your goals.

Contact

For more information on benefit corporations, contact Patricia McGowan, partner, at [email protected] or 959-200-7007 or Kristen Brown, senior manager, at [email protected] or 959-200-7052.

Any advice contained in this communication, including attachments and enclosures, is not intended as a thorough, in-depth analysis of specific issues. Nor is it sufficient to avoid tax-related penalties. This has been prepared for information purposes and general guidance only and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is made as to the accuracy or completeness of the information contained in this publication, and CohnReznick LLP, its members, employees and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.