I have recently seen rising interest on the part of entrepreneurs in filing as a benefit corporation. However, upon discussing the choice, I have come to realize that many need more information about the basics of this type of corporate entity. The following is a basic beginner’s guide to the benefit corporation.
The whys of it
Entrepreneurs are increasingly interested in doing well by doing good. They want to bring together the idea that a business can have a positive impact on social and environmental goals whilst also turning a profit. They are ultimately looking for the tax benefits and legal protections of incorporation while concurrently holding themselves to a higher standard on social and environmental issues.
Realistically, traditional for-profits and nonprofits are not designed for the simultaneous pursuit of social, environmental, and financial bottom lines (also known as the “Triple Bottom Line”). The conventional idea of a business is that its sole purpose is to create value for shareholders — the pursuit of profit and infinite growth regardless of the cost to society or the environment. Traditional corporations can form for any lawful purpose but have no explicit public-benefit requirement.
The benefit corporation expands a company’s purview to take into consideration the interests of all stakeholders, not just shareholders. This in turn helps to ensure that the core values of the business are maintained for the long-term. This is not to say that these entrepreneurs are not interested in profit, but rather in balancing the firm’s fiduciary duty between its shareholders and stakeholders.
Reasons entrepreneurs have given for consideration of benefit-corporation status cover a broad range of topics including: leading a movement by voluntarily complying to higher standards, differentiating from competitors, attracting and engaging the workforce (especially those currently age 35 and under), and measuring their performance against peers.
Where can benefit corporations form?
Benefit corporations are guided by state law. Currently 31 states have enacted benefit corporation laws including New York State (NYS) which enacted legislation in 2011. Benefit-corporation filings in this state are overseen by the Department of State, Division of Corporations.
The division says that benefit corporations are formed for the purpose of creating a “general public benefit.” General public benefit is further defined as “material positive impact on society and the environment, taken as a whole, as assessed against a third-party standard, from the business and operations of a benefit corporation.” Ultimately, the benefit corporation, not the state, has the responsibility to determine what is deemed a material positive benefit.
How you go about forming a benefit corporation in NYS?
Following are the simplified steps to forming a benefit corporation in NYS.
1. Consider entity choice and what it means for taxation
While the benefit corporation has the feel of a hybrid legal entity that blends elements of nonprofit and for-profit corporations it is taxed like a traditional corporation and in NYS your underlying entity type will be either an S-corporation or C-corporation.
2. Consider legal requirements that may prevent filing as a benefit corporation
Verify your industry does not have requirements that would prevent it from opting to be a benefit corporation (typical examples would be professional corporations including attorney, insurance, or doctor’s practice).
3. Review and understand governance requirements
Understand ongoing governance issues such as the mandatory annual filing requirements affecting benefit corporations. In NYS, benefit corporations must file an annual report within 120 days of the end of the corporation’s fiscal year-end with the New York Department of State.
4. Prepare and file forms to incorporate as a benefit corporation
Online and paper filings are allowed for benefit-corporation formation in NYS and currently require a $125 fee for incorporation.
An existing corporation has the option to convert to a benefit corporation by amending its certificate of incorporation. For more information, visit the Department of State, Divisions of Corporations website: https://www.dos.ny.gov/corps/index.html.
Certain circumstances may dictate that your company become or stay an LLC (limited-liability corporation). While an LLC is not an entity type that can be used to file as a benefit corporation, the LLC has the option to make an amendment to its articles of incorporation. This allows the intent to operate under the spirit of a benefit corporation.
B-Corp certification vs. benefit corporation
Be aware that B-Corporation certification is different from benefit-corporation status. B-Corp certification is a third-party designation offered by B-Lab.
Karen Livingston is a state-certified business advisor at the Small Business Development Center (SBDC) at Onondaga Community College. Contact her at email@example.com
Author’s note: The information contained in this article does not constitute legal advice. It is provided solely as a reference. You should consult with a legal representative or accountant before taking any actions.