Over the last several years, there has been a dramatic increase in entrepreneurs interested in using business to drive positive social change. While corporations retain substantial flexibility to pursue social and environmental goals under a legal concept called the “business judgment rule”, traditional corporate law generally holds that the purpose of a corporation is to maximize shareholder value. (For a discussion of traditional corporate forms, see our article Choosing the Correct Business Entity: The Basics). This is particularly true in an acquisition scenario: when a company is sold, directors have to maximize immediate return for shareholders and sell the company to the highest bidder.
Recently a new corporate entity has emerged to accommodate the interests of companies that seek to pursue both profit and purpose: the benefit corporation. The benefit corporation broadens the perspective of traditional corporate law by expanding concepts of purpose, governance, transparency and accountability with respect to a broad range of stakeholders, not just stockholders.
Traditional vs. Benefit Corporation
Although legislation does vary significantly across jurisdictions, the following table describes the main differences between traditional and benefit corporations.
|Purpose||The purpose of the corporation is to create value for its stockholders.||In addition to stockholder value, benefit corporations must commit to producing a general public benefit and to operate in a responsible and sustainable manner.|
|Governance||Directors have a fiduciary duty to manage the corporation in the best interests of the stockholders.||Directors must consider the interests of chosen constituencies other than shareholders that are affected by the company’s conduct (e.g. employees, local community, the environment).|
|Transparency||Shareholders have limited rights to inspect the corporation’s books and records.||The corporation must report on its overall social and environmental performance to shareholders, and in some jurisdictions, to the public.|
|Accountability||Stockholders can sue for breach of fiduciary duties, generally for failure to maximize economic return for shareholders.||In addition to standard shareholder rights, shareholders can sue to enforce the company’s public benefit mission. In some states, stakeholders affected by the corporation’s conduct can also sue to enforce the corporation’s public benefit mission.|
While some version of the benefit corporation has been adopted in 30 states and the District of Columbia, the Delaware Public Benefit Corporation, or PBC, has quickly become the de facto standard. PBCs enjoy the traditional benefits of incorporating in Delaware, including the robust corporate law framework, as well as a carefully drafted benefit corporation statute. (For more information on incorporating in Delaware, see our article Where Should You Incorporate?) Since the law creating the PBC became effective in 2013, hundreds of companies have formed as or converted to PBCs, including well-known consumer companies like Kickstarter and Method Products.
If you are interested in incorporating or converting to a Public Benefit Corporation, see our articles Delaware Public Benefit Corporation — Is It Right For You? and You’re a Delaware Public Benefit Corporation — Now What?
Last updated: May 2017