A Brief Primer on Benefit Corporations for Social Entrepreneurs in California

On September 22, 2016, the ladies of Smith Shapourian Mignano LLP presented on the topic of benefit corporations.  For those of you who were unable to make it to our lunchtime presentation, we decided to blog about the topic.  Feel free to read on, and contact us if you have any questions.

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What is a Benefit Corporation?

In the United States, 30 states and the District of Columbia have authorized a type of corporate entity called a “benefit corporation.”  A benefit corporation is a type of for-profit corporate entity that specifically defines its goals to include a positive impact on society, workers, the surrounding community, and/or the environment, in addition to profit.  

Why Incorporate as a Benefit Corporation?

As a social entrepreneur, you may incorporate a benefit corporation in California.  

One of the primary reasons why you may choose to structure your company as a benefit corporation over another type of for-profit business entity such as a C corporation or limited liability company is because a benefit corporation legally protects your social goals in perpetuity.  Structuring your company as a benefit corporation effectively gives “teeth” to considerations other than just profit.  The directors can be held liable by the company or its stakeholders, not just the shareholders that appointed them, if they do not prioritize/accomplish the beneficial goals stated in the Articles of Incorporation by way of a public benefit enforcement proceeding brought by the benefit corporation itself, or derivatively by a shareholder, a director, or a person or group owning 5 percent or more in corporate equity.  

Second, incorporating your company as a benefit corporation may allow your company to stand apart from other for-profit companies, and capitalize on customers that appreciate values such as corporate accountability and who endeavor to purchase products and/or services from companies with dedicated beneficial goals.

Third, if you are looking to fund your corporation by way of equity financing, some mainstream investors are looking to fund corporations with beneficial purposes (click here to read more).  Incorporating your company as a benefit corporation distinguishes your company from other companies seeking investment.  (Note: If you are considering equity financing, you may want to incorporate as a public benefit corporation in Delaware, rather than as a benefit corporation in California.  Some investors may prefer the corporate laws of Delaware, and prefer to invest in Delaware-based entities, generally speaking.  Please feel free to contact us to learn more about this topic.)

What Are the Requirements of a Benefit Corporation?

One of the primary requirements of incorporating your company as a benefit corporation is that you must disclose that it is a benefit corporation within its Articles of Incorporation.  Additionally and as a best practice, you may include the specific purpose of your company in your Articles of Incorporation.  

Second, your company’s share certificates must specifically state the beneficial nature of the corporation.

Third, you must publicly disclose (and post to your website, if you have one) an annual report which measures your company’s overall social and/or environmental performance against a third-party standard which meets statutory requirements.  The process for selecting this third party standard must be disclosed within the annual report.  The purpose of this annual report requirement is to promote corporate transparency and incentivize the benefit corporation to prioritize/accomplish its beneficial goals.
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Smith Shapourian & Mignano, LLP is available to answer any questions or concerns you may have regarding incorporating your business as a benefit corporation.  Please contact us for a consultation.

This blog does not constitute solicitation or provision of legal advice, and does not establish an attorney-client relationship. This blog should not be used as a substitute for obtaining legal advice from an attorney licensed or authorized to practice in your jurisdiction. You should always consult a suitably qualified attorney regarding any specific legal problem or matter in a timely manner, as statutes of limitations may bar your claim.