On January 1, 2014, the Nevada Secretary of State began accepting filings for a new entity, the benefit corporation, or “B corp.”
Officers and directors of traditional corporations labor under a fiduciary obligation to turn a profit for shareholders. A corporation’s failure to do so can result in a shareholder derivative suit, where the individual shareholders sue the management or board for failure to keep profits in the crosshairs. Companies turning an eye toward social change and community activism have recently struggled with whether to incorporate as a for-profit business or as a non-profit. The benefit corporation is a marriage of the two, with one major misconception I’ll address later.
A concept pioneered by globally conscious retailer Patagonia, the benefit corporation allows a for-profit company to subordinate its fiduciary duty to turn a profit to a larger, more “beneficial” goal. Whether a company would qualify for B corp status depends on the type of work it will be doing. In Nevada, a company can qualify as a benefit corporation when it creates a “general public benefit” which is defined in AB 89 as “a material positive impact on society and the environment as assessed against a third-party standard that satisfies certain requirements.” Clear as mud, right? The Articles of Incorporation will identify specific public benefits such as preserving the environment, providing the underserved with products or services, or promoting the arts or sciences.
As a relatively new entity type, benefit corporations will be subjected to a significant amount of scrutiny. In addition to standard annual reporting required of all corporations, B corps will also be required to provide “benefit reports” as evidence they are adhering to their beneficial purpose. These reports must be submitted to shareholders, the Secretary of State, and published online. Directors and officers will be required to consider the impacts of their decisions not only on shareholders but also “stakeholders” to include employees, suppliers, customers, the environment, the community, and any other faction that the corporation’s purpose might affect.
Benefit corporations can be formed in Nevada by filing appropriate articles of incorporation. Existing corporations can become benefit corporations by filing amended articles with the Secretary of State and paying the associated filing fee.
Now, for the common misconception. Many people think a B corp is tax-exempt, like a non-profit. In fact, benefit corporations are for-profit entities. Therefore, they are subject to the same tax requirements as a traditional corporation. The only difference is that management’s pursuit of a social benefit wouldn’t make them liable for a breach of their fiduciary duty to turn a profit. I share the opinion of others who have also studied the B corp – as of now, the entity type is more of a marketing play than anything. Many of the clients I’ve discussed this option with ultimately decide that the scrutiny isn’t worth the potential PR.