16 Sep Benefit Corporations: Profit While Doing Good, But Worthwhile?

You may not have heard about this yet, but over the last few years close to 30 states (including Delaware, NY and California) and DC have approved and another dozen or so have introduced legislation to permit so-called “benefit corporations.” The concept is that the corporate purpose can be for profit but also most include a social mission. The board not only can, it must take that into consideration in its decision making. And most of these statutes require filing an annual report of your work towards the public good. The statute allows the board not to breach a fiduciary duty if doing something for the public good is at the expense of profit. More and more venture firms like companies with a social mission along with making money. And other investors can be attracted to the idea of helping a worthy cause while profiting as well.

States have rushed to embrace this for two  reasons. First, money. They think people will flock to the concept and pay them various franchise and other taxes. So it’s just a matter of time before all states do so I think. But the problem is that these companies have no special tax benefit like not-for-profits which are exempt from income tax and provide tax-deductible contributions from donors. So many are thinking they can pursue social good without the legal obligation and use LLCs or other types of entities. Others have a separate not-for-profit running alongside their normal business. And some don’t want the hassle of the annual report. According to Huffington Post, only about 300 benefit corporations have been formed so far.

The second reason states have done this is strong lobbying through B Lab, which gives any qualifying business a “B Corp” certification as pursuing social good and profit simultaneously. They pushed for the benefit corporations to get over the concern about boards normally having a duty to maximize profit only. To make benefit corporations more attractive, states may want to consider some type of special deal for them. How about a lower franchise tax? Or maybe the IRS would allow pass-through tax treatment like an LLC or a Subchapter S corporation without the Sub S restrictions. And maybe consider making the annual report voluntary, or very simple. That might attract folks to this type of entity and enhance the public good that will come from it. Otherwise, it may be challenging to draw people into the concept. Just a thought.