B the Change You Wish To See: Is a Benefit Corporation Worth It?

8 Oct

benefit corporations

The deeply flawed protagonist of the iconic show Mad Men once remarked, “There is no big lie. The universe is indifferent.” If Don Draper witnessed what precipitated the financial crisis of 2008, he may have conceded the big lie in bewilderment.  We all know how the story goes since – there is public outcry over the home mortgage crisis and the ensuing government bailout, Congress enacts legislation to institutionally reform the financial sector and capital markets, and, one could posit, the universe isn’t so much indifferent as it is self-correcting. Still, while much of the reform may seem cosmetic, imagine a state legislator or civil servant-lawyer in Maryland thinking about the dire state of things and, to make things better, comes up with one novel solution – a private corporation that benefits people and the environment, thereby making people feel good about business. Maryland quickly passes legislation in 2010, the first state in the union to do so, and voila, the benefit corporation is born.

So, what’s the deal? One would think having the word ‘Benefit’ before ‘Corporation’ may provide a garden variety of practical advantages, but a deeper look begs the question: does a Benefit Corporation really live up to its name? To add further confusion, a Benefit Corporation, a legal entity created by state statute, is distinct from a B Corp, which is a classification designation obtained through a strict, rigorous process that inherits a massive amount of ongoing scrutiny.

Come Again? Please Distinguish

Remarkably, the only minimum requirement to become a Benefit Corporation is the motivation to join. Yes, following the standards aligned with a Benefit Corporation are entirely voluntarily. Whereas the certification process to obtain B Corp classification will make any founder go Mad Hatter on his dinner table subjects. Simply put, a B Corp is similar to a non-profit that must focus on the greater public good, but is still taxed as a business.  Please, have a seat with your tea and crumpets, sir, as you are about to receive some alarming news –  there are no tax benefits for a B Corp or a Benefit Corporation over traditionally incorporated companies.

So, no tax benefits, and yet, unlike C Corps or LLCs, B Corps must adhere to the most elevated ethical standards of conducting business, while being subjected to thorough scrutiny of the powers-that-be. To become a B Corp, a company must complete an Impact Assessment.  The company must score a minimum of 80 out of 200 points to qualify. There are 40 different versions of the Impact Assessment depending on your industry, company size, et. al. The criterion is byzantine but, I argue, productive. Does the company have a history of financial disclosure and transparency with its employees? Do the company use renewable energy sources to power its operations, and if so, how much? What social and environmental criteria does the company impose on its vendors and suppliers? Has the company’s explicitly incorporated its commitment to social impact and the environment into its mission statement?

Why Bother Obtaining B Corp Status?

Because it’s good for humanity. And, it embraces moral, ethical and social values that promote the ideals of how business should be conducted.

Many companies that have obtained B Corp status have done so not for any legal or financial advantage, but to join a movement that is socially conscious.  Inviting the rigorous standards of maintaining B Corp status further motivates these founders to continue their social stewardship and not fall off the bandwagon. The world is indeed not indifferent.

 

Sounds Great, But Can I Just Become a Benefit Corporation Instead?

Sure you can.  The uber-cool prescription glasses company Warby Parker is, and here’s why being a Benefit Corporation is a good thing: Quintessentially, a corporation’s first priority and mission is to maximize its profit to the benefit of its shareholders.  A Benefit Corporation however, and by extension its Board of Directors, must consider the social and ethical components of any such decisions.  A great textbook example cited by major business journals is when Unilever acquired Ben and Jerry through a hostile takeover. Ben Jerry initially rejected Unilever’s offer and instead accepted a lesser offer that embraced its socially conscious corporate mission. Unilever sued and won on the grounds that Ben Jerry had a fiduciary obligation to ensure the maximum return to its shareholders.  Ben and Jerry lost control of their own company.  If it had been a Benefit Corporation, Ben and Jerry may have been able to prevent such a takeover.

The Benefit Corporation is a legal creation barely out of its diapers, so before you dismiss it outright, think about how you want to conduct business and what type of company you wish to run – for yourself, your employees, and your stakeholders. An old Nigerian proverb says, “better a single decision maker than a thousand advisors.” Your key decision now may very well determine the direction of your company for years to come, with benefits that is.

Have more questions?  Email Sheheryar Sardar of Sardar Law Firm LLC.

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