December 1, 2017 marks a notable anniversary for social enterprise in Massachusetts. Five years ago today on December 1, 2012, the benefit corporation statute – MGL Chapter 156E – went into effect.
What are benefit corporations?
Generally speaking, a benefit corporation is a for-profit business corporation whose directors and officers have expanded fiduciary powers to consider not only the maximization of shareholder value but also the promotion of a social purpose in connection with the corporation’s business activities. The directors of a benefit corporation must also consider stakeholders who may be affected by the corporation’s actions when making decisions.
While traditional corporations may pursue the “triple bottom line” approach of pursuing profits, promoting one or more public benefits, and considering a range of stakeholders affected by the corporation’s actions, a benefit corporation must do so. Thus, to consider a range of stakeholders when making decisions – including but not limited to the corporation’s shareholders – is a hallmark of benefit corporation governance.
Benefit Corporations in Massachusetts and Other States
Massachusetts was the 11th state to authorize the formation of benefit corporations. Since then, 22 more states and the District of Columbia have enacted benefit corporation statutes. In addition, the State of Washington has legislation authorizing the formation of social purpose corporations, which are similar to benefit corporations in purpose and intent. A state-by-state map showing states that have passed or that are considering benefit corporation legislation can be found here.
The first benefit corporation statute was enacted in Maryland in 2010. Over the past seven years , more than 4,100 benefit corporations have been formed. At present, the states with the most benefit corporations are:
- Nevada (974)
- Delaware (812)
- Colorado (526)
- New York (475)
- Oregon (361)
The most dramatic increase in benefit corporation formations appears to have been in Delaware over the past year, from 506 to 812 public benefit corporations organized in that state. This represents a 60% increase. (Note that the Delaware statute uses the term “public benefit corporations.”)
Over the past five years, 63 benefit corporations have been organized in Massachusetts.
Comparison to Nonprofit Corporations
Although benefit corporations may have similar public benefit purposes as nonprofit corporations, the fact that benefit corporations are taxable for-profit entities significantly distinguishes them from nonprofit corporations. Unlike nonprofit corporations, benefit corporations have owners and can issue various forms of equity and debt. They may distribute earnings to shareholders and otherwise operate for the benefit of their investors. Benefit corporations can also elect to be S corporations and may be part of a holding company structure.
In contrast, a nonprofit corporation may not be owned by any individuals or entities and if it is a tax-exempt organization, its assets generally may not be used for the benefit of private interests. Instead, the assets and earnings of nonprofit organizations do not get distributed to those who control them. Nonprofit corporations that qualify as public charities are generally exempt from tax and are regulated by the Non-Profit Organizations/Public Charities Division of the Attorney General’s office.
Risks and Opportunities of Benefit Corporations
Benefit corporations still represent a relatively new type of corporate entity. It may take time for the distinguishing features of benefit corporations to become widely known. In the meantime, investors and consumers may not fully understand or appreciate what sets benefit corporations apart from traditional corporations. In many states, certain fees specific to benefit corporations (e.g., fees related to producing an annual benefit report) may add an extra burden to startup businesses. Also, legal issues facing benefit corporations may not emerge for some time and certain investors and directors may be unwilling to take on undefined risks.
On the other hand, benefit corporations provide several opportunities for business owners. The fiduciary flexibility of a benefit corporation’s board of directors enables it genuinely to consider a broad array of factors when making decisions and focus on long term priorities over short term gains, without automatic deference to maximizing shareholder profit in the short term. Socially conscious investors may find benefit corporations an attractive vehicle as well, affording them an opportunity to support a venture that increases the common good and provides a return for its owners. Benefit corporation status may also help to distinguish a benefit corporation’s products and inspire brand loyalty in a crowded marketplace.
In addition, a charitable organization that wants to set up a taxable subsidiary may find it attractive to set up a benefit corporation so that the purposes of the subsidiary align with the charity’s mission.
To commemorate this notable five-year landmark, Casner & Edwards will post a series of client advisories next week focused on benefit corporations. So stay tuned!