Benefit Corporations & Hybrid Entities Under the Law
In recent years, a new form of for-profit corporation has been gaining the attention of business owners and state legislators. Known as the “benefit corporation,” these types of corporations first appeared in 2010 and have quickly spread to at least 30 different states in the United States. It is anticipated that benefit corporations will soon become an alternative business model available in virtually every state in the country.
What Are Benefit Corporations?
Benefit corporations are for-profit corporations that have a stated legal purpose to contribute positively to society and the environment, in addition to obtaining profits for shareholders. Benefit corporations rely on the same business structure as traditional corporations, including appointing officers and directors, creating a board, and allowing for shareholder-owners. However, unlike traditional corporations, those in charge of operations of a benefit corporation are charged with considering not only the profit margin of the company, but also the impact of corporate decisions on the benefit corporation’s social and environmental goals. Likewise, shareholders must consider not only the growth of the company, but also its success in having a positive social impact.
As registered entities, benefit corporations must also abide by certain requirements unique to their status. First, they must routinely publish benefit reports that discuss the social and environmental impacts of their endeavors, in addition to normal financial reporting. These reports are meant to further the objective of transparency. The reporting requirement also contains an enforcement mechanism. If shareholders feel that a corporation has failed to uphold its social and environmental commitment or is not reporting its impacts, there is a private right of action in the form of a benefit enforcement proceeding to enforce the corporation’s benefit purpose.
The Advantages of the Benefit Model
While the societal advantages of a benefit corporation are obvious, there are also significant benefits for the corporate entity itself and its owners. Consumers are increasingly concerned with the broader impacts of their purchases and the ethical implications of where they use their money. Many benefit corporations find that premising their business on a social or environmental goal, as well as a financial motive, helps to distinguish them from competitors and appeal to socially conscious consumers. Likewise, employees, officers, and directors may be more drawn to devote their energy and skills to a company that they feel is making a positive contribution to society.
It is important to recognize that, unlike non-profit corporations, benefit corporations do not gain any special tax status or tax exemptions by virtue of their benefit status. Since, at the end of the day, benefit corporations remain for-profit entities, they continue to be taxed in the same manner as their traditional corporate counterparts.
Benefit corporations are one type of the business model now known as a “hybrid entity.” With the increasing focus on social enterprises, hybrid entities are increasingly popular for their commitment to both for-profit and non-profit purposes. Unlike non-profit corporations, however, they are not devoted solely to fundraising or charity. Instead, they seek to harness the power of their social goals to develop a business structure that is both beneficial to others and commercially successful. For instance, a hybrid entity may include a business model that sells a product in a normal commercial market, but for each product sold it donates a benefit of some form to a community in need. Hybrid business formation remains an area of intense development and discussion, and it is constantly evolving as business entrepreneurs and shareholders search for additional ways to combine social goals with a sustainable business structure.
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