Is A “Benefit Corporation” The Right Fit For Your Company?

As a Colorado business attorney, there is a lot of discussion lately about a new and growing corporate charter, the “Benefit Corporation.”  This was the topic of a recent well written article in the Wall Street Journal by Angus Loten titled . Currently, seven states have passed laws providing for companies to designate as Benefit Corporations: Maryland, Vermont, New Jersey, Virginia, Hawaii, California and New York – with bills introduced in four other states – one of which is Colorado.

Currently before the Colorado Legislature is SB 11-005, concerning Benefit Corporations. The Bill would permit Colorado corporations to set forth a primary “purpose of promoting general public benefit” as opposed to maximizing their profit.  Designation as a “Benefit Corporation” does not create non-profit corporation, nor is it a tax-exempt status. Simply, the Benefit Corporation is a new legal structure that facilitates the growing interest in “social entrepreneurship.”

Existing Colorado corporations seeking to become Benefit Corporations would, by minimum status vote, amend their existing articles of incorporation to include a statement that the corporation is a benefit corporation. Not yet formed corporations would incorporate in accordance with the Colorado Business Corporation Act and also state in their articles of incorporation that they are a Benefit Corporation.

Further, the Benefit Corporation would have the purpose of promoting “General Public Benefit”, which, under the Bill, “means a material, positive impact on society and the environment, taken as a whole, as measured by a third-party standard, from the business and operations of a benefit corporation.” 7-138-102(4) … and may identify a “Specific Public Benefit” that the corporation intends to promote, such as:  “Providing low-income or underserved individuals or communities with beneficial products or services; promoting economic opportunity for individuals or communities beyond the creation of jobs in the normal course of business; preserving the environment; improving human health; promoting the arts, sciences, or the advancement of knowledge; increasing the flow of capital to entities with a public benefit purpose; and conferring any other particular benefit on society or the environment.” 7-138-102(7)(a)-(g).

Additionally, the Colorado law would require heightened oversight in the form of an “Independent” designated benefit director who must prepare to be included in the required Annual Benefit Report an opinion regarding whether the corporation acted in accordance with its stated General and Specific public benefit purpose; complied with or failed to comply with the terms and provisions of the statute.

Benefit Corporation status is essentially an “add-on” to existing corporate forms that seek to act as a shield from investor allegations that the company is not maximizing shareholder value – thus, allowing the Corporation to put the benefit ahead of profits. It is important to note that a Benefit Corporation is not a “B Corp” certification – that is a privately administered label and not a legal status.

“For an investor, this is a terrible idea … The structure creates a lack of accountability … if the management of a benefit corporation makes a bad decision, there’s very little you can do about it as a shareholder.”  – Charles Elson, a teacher of corporate governance at the University of Delaware, as quoted in the Loten article.

Because the Benefit Corporate form is not yet available in Colorado (earliest it could appear on the ballot would be November, 2012), we have not seen how it will be received by Colorado businesses nor do we know how it will stand up against investor challenges such as those suggested by Mr. Elson.  One can certainly foresee such situations where bad decisions are defended under the banner of the Benefit Corporation form. Moreover, it is not out of the realm of possibility that corporations may seek Benefit Corporation status solely for protection from investors. Until the form is tested, it may be a better option to add specific goals in existing corporate documents, by-laws and corporate codes – thus rendering the need for Benefit Status unnecessary.

Colorado Business Attorneys

LaszloLaw is a Boulder, Colorado based law firm provides legal counsel to for-profit and non-profit businesses on a variety of business needs including corporate formation, risk management, corporate protection and legal compliance. Contact our Colorado Business Attorneys today to discuss your business and legal needs.