A benefit corporation is a for-profit company that works the same way a traditional corporation does but with one key difference. A traditional corporation is profit-driven and must make its shareholders’ profits its number one consideration.
A benefit corporation also aims to make a profit but must consider the social and environmental impact. It must have a beneficial social or environmental purpose and meet increased levels of accountability and transparency.
A common misconception about benefit corporations is that B corps are the same as benefit corporations. However, benefit corporations are legal companies recognized by the government, whereas B Corps must first earn certification from the independent non-profit B Lab.
Creating general public benefit is the purpose of a benefit corporation. This means that the company aims to have a material positive impact on the environment and society. The directors judge qualitative performance based on the benefit corporation’s stated aims.
So, the directors of a traditional corporation are tasked to focus on the corporation’s financial status. In contrast, the directors of a benefit corporation concentrate on profits and the impact on the environment and society.
In other words, the directors and officers of traditional corporations make decisions based purely on financial interests. On the other hand, a benefit corporation’s directors weigh the economic and nonfinancial interests when making business decisions.
Key features of a benefit corporation
There are five categories in which benefit corporations have targets, namely:
- Governance
- Workers
- Community
- Environment
- Customers
By setting goals and progressing in these five areas, benefit corporations contribute to their communities, treat workers fairly, preserve the planet, and create social good.
Why become a benefit corporation?
A benefit corporation gives directors secured legal protection, allowing them to consider the interest of all stakeholders rather than just the shareholders.
In other words, incorporating as a benefit corporation legally protects the goals of entrepreneurs by considering factors besides profit. A benefit corporation can also help to solve social and environmental challenges.
But like all types of companies, benefit corporations do come with their pros and cons. In this next section, we’ll talk about the different advantages and disadvantages of benefit corporations that you should consider before making your choice.
Advantages of a benefit corporation
- Encourages social responsibility
A benefit corporation holds you accountable for your company’s impact on environmental and social issues. The world is becoming more interested in sustainable companies and wants to see their social efforts. The transparency requirements of a benefit corporation show customers how the companies they support are making a difference.
- Attracts like-minded employees
A business actively attempting to make a positive social change will attract talent who want fulfilment in their careers. This also means you’ll be able to retain top talent because being a benefit corporation validates the company culture.
- Provides access to private investment funding
Your company can easily attract investors when its purpose is transparent, well-known, and legally secure. That said, for-profit businesses could accelerate client due diligence by producing a thorough gain study explaining their strategic initiatives to achieve public benefit.
- Balances non-financial and financial priorities
Companies that put social and environmental responsibility ahead of financial gain enjoy the legal protections afforded to benefit corporations. Directors and officers of a company with benefit corporation status can consider financial and non-financial considerations when making corporate choices.
Disadvantages of a benefit corporation
- Reporting requirements
The transparency requirement takes extra time and adds costs and administrative burdens to the corporation to publish the Annual Benefit Report.
- Fringe perks
A benefit corporation is equally about the social and environmental impact as the
financial aspects. There are no real financial perks, such as tax benefits or direct financial incentives.
- Mission
Benefit corporations have less flexibility to change direction. Once a social purpose is noted in the corporate formation documents, a significant majority vote is required to change the social objective of the benefit corporation.
Types of benefit corporations
King Arthur Flour
Compared to its major rivals, King Arthur Flour stands out, and not simply because of its superior baking qualities. King Arthur is a type of benefit corporation that prioritizes social and environmental goals just as much as financial ones.
Employees of King Arthur own the company. In addition to a share in profits, they enjoy 40 hours of paid volunteer work every year. King Arthur gives a lot of money to anti-hunger and school-education programs. It also recycles paper, runs on renewable power sources, and donates leftover food to a nearby farmer.
Patagonia
Patagonia’s goal as a benefit corporation is to provide the greatest product possible while avoiding causing any harm and using its commercial success to help end environmental destruction.
The organization has donated 1% of annual revenues to environmental causes every year since 1985. They’ve given out more than $140 million in funds and other forms of support to grassroots ecological organizations domestically and internationally to improve local communities.
Kickstarter
For Kickstarter, it’s all about supporting creative endeavors. Rather than focusing on financial gains, the company’s success is determined by how successfully it fulfills its objective. In 2015, they did so by reincorporating Kickstarter as a Benefit Corporation.
To achieve this goal, Kickstarter refuses to advocate for public policies that are not in line with its mission and ideals, even if doing so may result in financial gains for the business.
Kickstarter strives to reduce its adverse effects on the environment. It prioritizes environmentally friendly suppliers, funds green infrastructure projects, and promotes eco-friendly modes of transportation.
In addition, Kickstarter provides guidance and resources to assist artists in reducing their impact on the environment during routine service use, such as shipping and packaging.
Traditional corporation vs. benefit corporation
Let’s dive in and look at the key differences between a traditional corporation and a benefit corporation.
Purpose
The primary purpose of a traditional corporation is to create value for its shareholders — in other words, to make a profit.
In contrast, the primary purpose of a benefit corporation is to conduct itself responsibly and sustainably and produce a general public benefit in addition to providing value for its stockholders.
Governance
With a traditional corporation, the directors must manage the business in the best financial interests of the shareholders.
In contrast, with a benefit corporation, the directors are also responsible for the local community and the environment. Such interests are equally as important as the financial interests of the shareholders when it comes to decision-making.
Transparency
Shareholders have limited rights to inspect the books and records of a traditional corporation. In contrast, with a benefit corporation, it must report on its overall environmental and social performance to stockholders and sometimes the public.
Accountability
If a traditional corporation fails to put shareholders’ profits as the primary target of the business, the stockholders can sue for breach of fiduciary duties. A benefit corporation’s stockholders can sue to enforce and uphold the company’s public benefit mission.
Social responsibility
A benefit corporation has a social responsibility to protect and uphold the community and all stakeholders’ interests, not just the shareholders’ financial interests. It has a social responsibility to its community. A traditional corporation has a duty to its shareholders, but benefit corporations prioritize social responsibility above their stakeholders.
Sustainability
Many scholars feel that it’s time to bring forth new business models. The days of the traditional thinking that businesses are purely economic entities are over, and we are moving toward models where sustainability concepts are central to the company’s mission. These sustainability concepts must be part of the decision-making process.
Accountability
The directors and officers of a benefit corporation are protected from the breach of “fiduciary duty.” They have the right and responsibility to carefully consider their business’s impact on society and the environment.
Legal considerations of forming a benefit corporation
Benefit corporation laws and requirements vary from state to state, but, generally speaking, a benefit corporation must state a general benefit purpose in its incorporation articles. Similar to a traditional corporation, a benefit corporation is formed by filing articles of incorporation within the state.
Benefit corporations must publish an Annual Benefit Report that assesses social and environmental performance.
The report is sent to shareholders and published on the company’s website. Some states require that a corporation be filed with the state. A benefit corporation demonstrates that it is upholding its public benefit purpose.
Benefit corporations are allowed to sacrifice profits in their quest to achieve social goals. Benefit corporations may not be as popular with investors because they don’t focus solely on the financial interests of the shareholders. Benefit corporation owners should develop a strategy to attract investors that value social and environmental causes as much as they love profits.
New companies can incorporate as benefit corporations in whichever states legislation on benefit corporation has been passed.
Responsibilities of a benefit corporation
To sum up, the primary responsibilities of a benefit corporation are as follows:
- Declare a commitment to creating a general public benefit
- Adopt a third-party standard
- Publish an annual benefit report
- Distribute the annual benefit report to shareholders and post it on the company’s website.
A benefit corporation is responsible for improving its communities and environment. It’s responsible for causing a positive material impact. It does not base decisions solely on financial interests like a traditional corporation but also environmental and social issues.
Examples of successful benefit corporations
Here are a few examples of successful benefit corporations:
- Kickstarter
Kickstarter is a global crowdfunding platform. It became a public benefit corporation in 2015 and declared its commitment to developing arts and culture.
- Plum Organics
Plum Organics was founded in 2007 and became a benefit corporation in 2013. Its mission is to help children grow up without processed foods and to educate American families on the importance of proper nutrition.
- King Arthur Flour Company
King Arthur Flour Company was founded over 200 years ago and is 100%
employee-owned. This company encourages employees to participate in local
volunteering activities and promotes environmental sustainability.
- AltSchool
AltSchool is a network of technology-driven micro schools founded in 2013. They became a benefit corporation in 2014 and have invested in the formation of thousands of students since then.
- Patagonia
Patagonia was the first company in California to elect benefit corporation status. Their mission is to create a positive impact on society and to continue making their products with a minimum footprint on the environment.
Conclusion
The directors and officers of a benefit corporation are protected from legal action for not fulfilling “fiduciary duties.” They can put social good ahead of profits without risking shareholders’ actions.
In this day and age, where so many people value authenticity and sustainability, becoming a benefit corporation will help you stand out. It shows your commitment to your community, employees, and the environment.