BENEFIT CORPORATION: Meaning & Understanding the Benefit

benefit corporation
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Benefit corporations are a relatively new business structure. These organizations can now be incorporated in 36 states, thanks to legislation passed in Maryland in 2010. However, as with most new things, Delaware public benefit corporations are fraught with ambiguity. Your benefit corporation in California, and definition, questions will be answered below.

Benefit Corporation Definition

A benefit corporation (BC) is a firm with two goals: to make money and to benefit the general good. A benefit corporation does both. A for-profit corporation’s sole objective is to create a profit for its shareholders, while a nonprofit’s sole aim is to fulfill its mission or help its beneficiaries (such as promoting environmental sustainability or serving low-income individuals). The above definition will help you understand that benefit corporation directors must report on how they are achieving their public benefit purpose to their shareholders (and in some states, to the general public).

Check your state’s legislation before deciding to start a benefit corporation. Benefit corporations are not in every state, and some require additional paperwork and annual reporting. You can start a new benefit corporation from scratch if the BC entity is available; if you currently have a for-profit business, you can convert it with the consent of your shareholders.

How Is This Different from a Regular Corporation?

In its most basic form, corporate law provides that directors are accountable for working in the best interests of their shareholders and enhancing the value of their shares. This means that conventional corporation directors could face legal action if shareholders believe the director is not making the best judgments to maximize the value of their stock. A director’s role in a benefit business, on the other hand, is to evaluate not only how a decision would affect profit, but also how it will harm society and the environment.

For example, suppose that producing a product inexpensively in Brazil necessitates the destruction of 10,000 acres of rainforest. Producing the identical product in the US would be more expensive (and therefore less profitable), but no rainforests would be damaged. If a normal corporation’s director decided to produce the products in the United States, shareholders who believed the director wasn’t trying to maximize the value of their shares may sue. A benefit corporation’s director, on the other hand, would be to take this path if the decision has had a significant-good influence on society or the environment.

Advantages Benefit Corporation in California

The following are some of the benefits of forming a benefit corporation in California:

#1. Furthering the Public Good

The primary motivation for forming a benefit corporation is to enhance a public benefit that is important to you, as well as to ensure that your purpose continues after you and other shareholders have left the company.

#2. Taking Home a Profit

The profits of a benefit corporation are to the company’s shareholders. In contrast, you cannot distribute profits to the shareholders of a nonprofit business (apart from reasonable salaries). The profits of a BC are to the company’s shareholders. In contrast, you cannot distribute profits to the shareholders of a nonprofit business (apart from reasonable salaries).

#3. Attracting Customers and Employees

Consumers and employees who are drawn to the mission of a benefit business might become loyal customers and employees.

#4. Other Benefits of Traditional Corporations

Benefit corporations have many of the same advantages as ordinary businesses, such as restricted liability and tax breaks.

Disadvantages of Benefit Corporation California

The following are some of the disadvantages of forming a benefit corporation in California

#1. Not Available in Every State

Benefit corporations are not in every state. You can look into out-of-state registration if you can’t register a benefit corporation in your home state. Consult with an attorney to see if this is a viable choice for your company.

#2. Not Available for Every Business

From the benefit corporation definition, you grasp that is not available to all types of businesses. If you own a professional firm, such as a legal firm or an accounting firm, you probably won’t be able to incorporate a BC (you can instead form a professional corporation).

#3. Less Profit

Promoting the public good may result in lower profits for your stockholders in some instances.

#4. More Formalities and Paperwork

Benefit companies are more difficult to organize and maintain than other entities such as LLCs and partnerships. You must have a board of directors, file state paperwork, and submit annual reports.

Why Would Someone Form a Benefit Corporation in California?

The most basic response is that a director or business owner wants to use their firm to have a positive impact on society or the environment in addition to making a profit. Other reasons why someone might form a benefit corporation are below:

  • You want to make sure that the company’s objective is upheld over time. The corporation’s establishment documents will compel it to uphold certain standards and principles throughout its existence.
  • You want to set your company apart from the competition by appealing to a socially and ecologically sensitive clientele.
  • You want to be able to pick and choose to who you sell your company. Unlike a regular company, where the directors must find the greatest selling price to maximize shareholder profit, the directors of a benefit corporation can choose to sell at a lesser price to a buyer who will best uphold the benefit corporation’s goal.

Forming a Benefit Organization: Things to Know

Benefit corporation regulations definition differ slightly from state to state, but in general, a benefit corporation’s articles of organization must express a general benefit objective. The same as a company, a B corporation is founded by submitting articles of incorporation to the state.

In most jurisdictions, a benefit organization must publish an annual benefit report that examines social and environmental performance using a third-party criterion to verify that it is upholding its public benefit purpose. The report must be to the company’s shareholders and made available on the company’s website. It may also be required by state law to be lodged with the state.

For-benefit organizations may not be as popular with investors as traditional profit-centered corporations since they may forego earnings to pursue social aims. Benefit corporation owners may need to devise a plan to attract investors who place a high value on contributions to social or environmental concerns as well as profits.

Comparing Benefit Corporations to For-Profit Corporations

Benefit corporations are comparable to for-profit organizations in many aspects. In both cases, the shareholders are the owners, and the board of directors is in charge of the company’s direction. Both pay corporate income tax and file identical tax returns each year. The process of founding a benefit corporation is identical to that of forming a for-profit corporation, as detailed below.

In terms of purpose, benefit corporations differ from for-profit corporations. In the former, the sole goal of the company is to make money. The board of directors is legally to prioritize the stockholders’ interests, which entails making choices that maximize earnings (within the bounds of the law and fair dealing). In a benefit company, although one of the business’s aims is to generate a profit. It has a second purpose that serves the public.

Here’s an illustration. Assume you run a furniture business and have the choice of using recycled materials in the production of your sofas. If the board of directors of a for-profit firm determines that employing recycled materials results in lower profits, the board must vote against it since it is not in the best interests of the shareholders. If your company is a benefit corporation with environmental sustainability as one of its goals, the board of directors may propose using recycled products, even if it harms the bottom line.

Converting an Existing Business to a Benefit Corporation

You can convert a for-profit corporation into a benefit corporation if your state recognizes benefit corporations. In most cases, you’ll need to get approval from your board of directors and shareholders. Your state will next require you to file updated articles of incorporation and pay a filing fee. When you operate a nonprofit company, an LLC, or another sort of business, converting to a BC is more difficult. For further information, contact an attorney in your state.

Public Benefit Corporation vs. Certified Benefit Corporation

There is a distinction between a public benefit corporation that files with the state and a certified benefit corporation, commonly known as a B Corporation. B Corporations make a voluntary commitment to conduct their business with social and environmental concerns in mind. To be certified by B Lab, they must score at least 80 out of 200 on a survey known as the B impact assessment. After that, they’ll have to go through an audit. Finally, companies who want to keep their certification will have to pay B Lab an annual charge. In addition, before re-certification, corporations will make a commitment to form a public benefit corporation.

Delaware Public Benefit Corporation?

By filing a certificate of incorporation with the Delaware division of corporations, a Delaware public benefit corporation can be founded as a Delaware corporation. A Delaware public benefit corporation must have its certificate of incorporation properly labeled as such.

The public benefit(s) that the corporation will pursue must also be on the certificate of Incorporation. If the public benefit statement is incorrect or impermissibly presented, the State of Delaware has the authority to refuse a certificate of incorporation. Public benefits should be explicit enough to identify the cause, yet broad enough in scope to allow for future expansion in addressing the public issue.

For example, a public BC seeking to “ensure that pupils in grades 3 through 5 in X school district have sufficient access to organic fruits and vegetables in school lunches” may be overly considerate, especially in terms of geographic scope and age. “Ensuring that pupils in X counties, and eventually Y state as a whole, have sufficient access to nutritious school lunches,” the benefit might be good.

Similarly, the words “Public Benefit Corporation” must be conspicuously on a Delaware public benefit corporation’s stock certificates, or, in the instance of uncertificated shares, the language to the shareholder in connection with such shares must bear the Public Benefit Corporation designation. In every other way, however, a Delaware Public Benefit Corporation’s structure is identical to that of any other Delaware corporation.

FAQs

Who owns a benefit corporation?

A benefit corporation’s stockholders actually own the company and its assets. Other notable distinctions exist between the two organizations.

How are benefit corporations taxed?

Because of the benefit corporation definition, they are for-profit businesses, they are not tax-exempt like non-profits. Where applicable, a benefit company will be taxed as an S or C corporation, or as an alternative pass-through organization.

How many states have benefit corporations?

Benefit corporations legislation has been passed in 38 states, including the District of Columbia.

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