Legal Recognition that Money Isn’t Everything – The Benefit Company

Last year, Oregon became one of the now 26 states to give legal status to a new classification of business entity: the benefit company.  Commonly referred to as “B Corps” (as distinguished from “C Corps” and “S Corps”), status as a benefit company under Oregon law is not limited to corporations—limited liability companies (“LLCs”) can get in on the act too.  In fact, even those “C-Corps” and “S-Corps” that take their monikers from the subchapters of the Internal Revenue Code under which their tax liability is determined can also organize themselves as benefit companies under Oregon law.  This begs the question:  what is a benefit company?

Some Background

Corporate law imposes a duty on management to look out for the best interests of the company’s shareholders.  In other words, management owes a fiduciary duty to shareholders.  In the realm of for-profit businesses, courts have generally equated shareholder “interests” with “profits.” This means that management upholds its obligations by ensuring that all actions are taken have company profits as a primary motive.  For example, in the oldie but goodie Dodge v. Ford Motor Company, Henry Ford was held to have violated this duty by employing more workers, paying them better wages and selling cars for less with the express purpose of doing good, at the expense of maximizing company profits and paying shareholder dividends.

In contrast, charitable corporations and enterprises have long been recognized as a vehicle for accomplishing social good.  These non-profit entities are by definition, however, generally prohibited from distributing profits to their members, officers, or directors.

The benefit company strikes a balance between those traditional entity structures that are either primarily concerned or fundamentally unconcerned with making money.  A benefit company must have publicly disclosed principles and goals of benefiting the community, but also may turn a profit for its owners while doing so.

Organization vs. Certification

First, some terms need to be defined.  Prior to Maryland in 2010, no state officially recognized benefit companies.  To fill this vacuum, the 501(c)(3) non-profit B Lab Company began providing certification as a “B Corporation” for an annual fee.   Akin to the more familiar LEED or Fair Trade labels, the Certified B Corporation label can offer certain marketing and branding benefits but does not have any legal force.  In fact, a company does not need to be officially organized as a benefit company to qualify for certification.  B Lab does, however, also offer certification in connection with providing the statutorily required Third-Party Standard, discussed below.

On the other hand, organizing your company as a benefit company does have legal effect.  Organizing as a benefit company can only be accomplished via registration with a state that recognizes the benefit company form.  In Oregon, identifying your company as a benefit company is accomplished by including the necessary language in filings with the Secretary of State when the corporation or LLC is formed.  Legal registration as a benefit company offers management some protection from claims that they are failing to act in the best (profit) interests of other shareholders / members.  It also entails, however, a higher level of transparency and additional specific annual reporting requirements.

What do I need to do to run my business as a benefit company?

If you’re just staring out, the decision to become a benefit can be made when you first form the business.  Among other things, in order to register as a benefit company certain language must be included in an entity’s formation documents filed with the Oregon Secretary of State.  If you’ve already formed a company but are interested in operating as a benefit company, don’t worry—it’s not too late.  It is possible to convert your traditional corporation or LLC into a benefit company under Oregon law.

Beyond filing the necessary documents with the Secretary of State, in order to register as a benefit company, the business will need to lock down some guiding principles on how it intends to benefit the community and environment, and select a Third-Party Standard against which to measure its actual performance.  In addition to B Lab, there are a number of Third-Party Standard options to choose from.

While there are certainly many reasons to choose to organize a business as a benefit company, it is not right for everyone.  Karnopp Petersen LLP has a number of experienced business advisors that can assist in evaluating the pros and cons, including Ellen Grover who was a member of the Secretary of State’s Benefit Entity Legal Working Group responsible for developing the benefit company legislative concept.   If this is something that you are interested in for your company we would love to have the chance to discuss it with you in more detail to see if it is right for you.