On April 13, 2010 Maryland became the first U.S. state to pass a law allowing for a new type of corporation known as a Benefit Corporation. During the past four years, 25 states and the District of Columbia have followed suit, reaching a milestone that took the limited liability company more than 20 years to attain. Now Patagonia, Method and hundreds of other firms have incorporated as benefit corporations. To learn more about this intriguing new legal structure, we turn to Kyle Westaway, Founding Partner at Westaway Law and an expert at social enterprise law.
What is a benefit corporation?
A benefit corporation is a new class of corporation that has two distinctive features. Firstly, it changes the goals of the corporation and secondly, it increases transparency. Whereas the goals of a normal corporation are primarily centered on maximizing shareholder value or making the most profit for the owners of the company, the benefit corporation says we want to set up a corporation that emphasizes social and environmental impact along with standard financial objectives. The transparency element of the benefit corporation requires the company to issue a benefit report at the end of every year. The benefit report is an open report card to the world on how the corporation has performed against its social and environmental objectives.
How is “benefit” defined?
By law, every benefit corporation must pursue the “general public benefit,” which is defined as a “material positive impact on society and the environment, taken as a whole, as assessed against a third-party standard, from the business and operations of a benefit corporation.” Lawmakers and consumers rely on transparency and third-party assessors to measure impact and to keep benefit corporations accountable. Optionally, benefit corporations can dictate a specific public benefit that the company will pursue above and beyond general standards.
Can you give us an example of a specific public benefit?
Sure, the social network Ello has mandated that it will never show ads or sell user data. The great thing about a benefit corporation is you can dictate the purpose and values of the company in the charter and ensure the company stays aligned in the future. In the case of Ello, their charter requires that if the company is acquired, the buyer cannot allow ads or sell user data on Ello.
Who is responsible for measuring impact?
There are a number of private third-party assesors available for measuring social and environmental impact. The most popular choice is the B Impact Assessment administered by B Lab. The assessment is free and consists of 203 questions. The resulting report gives an overall rating and scores within four impact areas: Governance, Workers, Community and Environment.
While B Lab’s B Impact Assessment is free, there is a fee associated with certification. The annual fee is assessed on a sliding scale, ranging from $500 for startups with less than $1MM in revenues up to $25,000 for companies grossing more than $100MM a year.
Are there any tax advantages for benefit corporations?
Unfortunately, there are no tax advantages associated with being a benefit corporation. Apart from changes in purpose and transparency, a benefit corporation is just like a regular corporation.
Are the compliance requirements for benefit corporations too onerous for young companies?
No, it probably requires five extra hours of work a year and an additional $1,000-2,000 per year in legal fees to comply with benefit corporation requirements. You do have to be more intentional about policies. Board meetings also look a bit different, as directors have to consider the company’s impact on all stakeholders, namely: Community, Environment, Suppliers, Employees, Customers and Shareholders.
Are benefit corporations just another form of window dressing?
No they aren’t, because of the added transparency. The average company that completes the B Impact Assessment receives a score between 40 and 100 out of 200 possible points. Companies that are just looking for a quick way to seem “green” will quickly find that their lack of compliance will actually make them look less sustainable not more.
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Kyle Westaway is Managing Partner at Westaway Law – an innovative Brooklyn law firm that counsels social entrepreneurs – and a Lecturer on Law at Harvard Law School, where he co-teaches a course on social entrepreneurship.
He advises clients through each stage in the lifecycle of an organization from concept to acquisition, with the perspective of blending profit and purpose. He specializes in emerging legal structures designed for social enterprise such as the Benefit Corporation, L3C and Flexible Purpose Corporation. Kyle has been recognized as one of the leading independent attorneys in the US by Xemplar and has been selected as a Cordes Fellow. His work has been featured in The New York Times, The Wall Street Journal and Business Insider.
He is author of Profit & Purpose and writes on social innovation, entrepreneurship and emerging markets for The Guardian, The Wall Street Journal, TIME and Quartz. He launched socentlaw.com – a blog on the legal side of social enterprise, and careerinbeta.com – a blog on the future of work.