By Mark Henricks
Public benefit corporations, also known as benefit corporations, are for-profit businesses whose charters commit them to social or environmental missions, not just maximizing shareholder value. These corporations take into account how other stakeholders such as communities and the environment will be affected by their actions. Organizing as a public benefit corporation is seen as a way to help corporations adhere to these kinds of missions long-term, through changes in leadership and ownership.
In 2010, Maryland became the first state to enact laws that provide for public benefit corporations. Since then, 36 states (as of this article’s writing) have followed suit. More than 3,000 corporations across the country are incorporated as public benefit corporations. Well known examples include Patagonia, the outdoor products company, and crowdfunding platform Kickstarter. Laureate International Universities, an education company with $3 billion sales in 2019, is the largest publicly held benefit corporation.How Public Benefit Corporations Are Unique
Their biggest difference between regular and public benefit corporations is the explicit addition of social and environmental concerns to the goal of maximizing shareholder value. Ordinary for-profit corporations are legally required to focus strictly on providing the most possible financial value to shareholders. Unless it is a public benefit corporation, doing anything else exposes the corporation and its leaders to lawsuits from shareholders for violating its fiduciary duty. This makes pursuing missions that help communities or the environment at the expense of financial returns difficult for socially conscious for-profit businesses unless they are set up as public benefit corporations.
Existing corporations can, after getting the switch approved in a shareholder vote, file amendments to their articles of incorporation with their state’s secretary of state office to become public benefit corporations.
Public benefit corporations are distinct from nonprofit entities because they seek to earn a profit on their activities. Businesses receive no tax benefits from organizing as public benefit corporations. They are taxed the same way as other for-profit entities.
B Corporations are similar to public benefit corporations in that they also pursue social and environmental goals in addition to earning profits. B Corp is a certification provided by B Lab, a Pennsylvania nonprofit that measures a company’s social and environmental impact and issues the Certified B Corporation designation, in much the same way TransFair certifies Fair Trade coffee or USGBC certifies LEED buildings. Many but not all public benefit corporations are also B Corps.Pros of Public Benefit Corporations
Patagonia founder Yvon Chouinard said public benefit corporation legislation created a legal framework that enabled the company to institutionalize the values, culture, processes and standards he put in place in the company’s beginning. This would allow the company to stick to its original mission through leadership successions, rounds of financing and changes in ownership, he said.
In addition to empowering a company to go beyond the narrow focus of maximizing shareholder value, public benefit corporations also are designed to benefit the public. One way they may do this is by donating more of their profits to support nonprofits engaged in advancing causes that benefit communities and the environment. Another social plus is that public benefit companies are less likely to follow business practices that worsen social and environmental problems.Cons of Public Benefit Corporations
Public benefit corporations can be found in most but not all states, thanks to enabling legislation, and several more legislatures were considering it. However, in the rest of the country, including states like Ohio and North Carolina, there is no provision for a public benefit corporation.
Where they are legal, public benefit corporations tend to have a heavier paperwork burden. Many states require annual reports on the corporation’s public impact. And acquiring the B Corp certification can cost tens of thousands of dollars.
While some investors such as social investors find public benefit corporations appealing, the concept is still new. Some questions about potential liability should the corporation pursue an activity that benefits the public at the cost of the shareholders may still need to be settled by case law. As a result, so far public benefit companies have not been able to tap public markets for capital in the way ordinary shareholder value-maximizing companies have.The Bottom Line
Public benefit corporations represent a new concept and a new legal way of organizing a business entity available in most states. Like other for-profit businesses, they are engaged in earning profits and maximizing shareholder wealth. But public benefit corporations are also formally committed and legally permitted to support social and environmental benefits with their corporate activities. For example, such corporations aim to improve local municipalities or public works projects. A few high-profile companies are public benefit corporations, and several thousand public benefit corporations exist, but the concept so far has yet to become truly mainstream.Tips for Investing
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