If you are looking to incorporate a business, you may come across the term “benefit corporation,” or “public benefit corporation.” At first glance, it sounds similar to a nonprofit, but it is not the same thing. A benefit corporation is, in fact, a for-profit corporation with an expanded legal purpose.
Understanding what a benefit corporation is helps you decide whether it fits your values, your business goals, and how you want to balance profit with social or environmental impact.
In this article, we will break down the meaning of a benefit corporation so you know the key aspects of it.
What is a benefit corporation
A “benefit corporation” is a type of for-profit corporation that is legally required to pursue one or more public benefits in addition to generating profit for shareholders.
Unlike traditional corporations, which are primarily focused on maximizing shareholder value, a benefit corporation is required to consider the impact of its decisions on society, the environment, employees, customers, and the community.
This structure gives companies legal permission to do well financially for their shareholders while also doing good for society and stakeholders beyond just the shareholders.
For example, a company may form as a benefit corporation to promote environmental sustainability, support underserved communities, or improve public health, while still selling products and earning profits. This is a great example showing how a company can pursue maximum profits while at the same time engaging in business activities that are good for society in general.
How benefit corporations are formed
A benefit corporation is formed by filing articles of incorporation with a state that recognizes benefit corporation status. Not all states allow this structure, so availability depends on state law. As of the writing of this post, there are 42 states in the United States that have passed legislation allowing for the formation of benefit corporations.
The formation documents typically include a statement that the corporation is a benefit corporation and identify the public benefit or benefits it intends to pursue. In other words, you must provide an overview of the mission or benefit you are looking to pursue with the corporation.
An existing corporation can also convert into a benefit corporation by amending its governing documents and, in most cases, obtaining shareholder approval and then filing the necessary paperwork with the state where it was initially incorporated. To assess if this is a feasible option, be sure to review the laws and regulations applicable to this process.
For instance, a traditional corporation focused on ethical sourcing may decide to convert to a benefit corporation to formally align its legal structure with its mission.
The public benefit requirement
The defining feature of a benefit corporation is its commitment to a public benefit. A public benefit is a positive effect on society or the environment, taken as a whole. This could include reducing environmental harm, promoting economic opportunity, improving human health, or supporting education and the arts.
The benefit does not have to be charitable in nature, but it must go beyond the sole pursuit of profit. For example, a clothing company might commit to sustainable manufacturing practices and fair labour standards as its stated public benefit.
A notable example is Yvon Chouinard, founder of Patagonia. He wrote that a “benefit corporation legislation creates the legal framework to enable companies like Patagonia to stay mission-driven through succession, capital raises, and even changes in ownership, by institutionalizing the values, culture, processes, and high standards put in place by founding entrepreneurs.” As you can see, the idea here is for a corporation to remain dedicated to its mission of doing good over the years, even after multiple acquisitions, financing rounds, and changes in control.
How benefit corporations differ from traditional corporations
The key difference between a benefit corporation and a traditional corporation lies in the legal duties of directors and officers. In a traditional corporation, directors are generally expected to prioritize shareholder value (this is usually called “shareholder primacy.” In a benefit corporation, directors must balance shareholder interests with the corporation’s public benefit purpose and the interests of other stakeholders.
This expanded duty provides legal protection for directors who make decisions that support long-term social or environmental goals, even if those decisions do not maximize short-term profits. Some of the main provisions in a benefit corporation are:
- Purpose
- Accountability
- Transparency
- Right of action
- Change of control
For example, choosing a more expensive but environmentally friendly supplier may be easier to justify under benefit corporation rules. This type of decision may not be accepted by company officers or directors in a for-profit entity, but may be a sound decision for a benefit corporation.
Benefit corporations and liability protection
Benefit corporations, like other corporations, are separate legal entities from their owners. Just like any other corporation, shareholders typically enjoy limited liability protection, meaning they are not personally responsible for the corporation’s debts or legal obligations beyond their investment (although exceptions do apply, like in the example of fraud or the commission of criminal acts, etc.).
The benefit corporation status does not reduce or eliminate this protection. It simply adds an additional layer of purpose and accountability. In other words, the shareholders of a benefit corporation are protected the same way as in a traditional corporation. However, the company directors and officers are required to consider the mission of the corporation in their decision-making, that is not necessarily for-profit.
Reporting and transparency requirements
Most states that allow for benefit corporations require benefit corporations to produce a periodic benefit report. The filing fees in each state can vary between US $70 to $350.
The benefit report should explain how the corporation pursued its public benefit, how it considered stakeholder interests, and how it measured its impact. Some states require the report to be made available to shareholders or the public.
The purpose of this requirement is transparency. It allows stakeholders to evaluate whether the corporation is living up to its stated mission. For example, a benefit corporation focused on environmental impact may publish data on emissions reductions or sustainable sourcing practices.
It’s worth noting that there are some states that have included rules that allow them to remove a corporation’s benefit status or issue fines if they fail to provide their benefit report. This can certainly be a factor to consider when incorporating a benefit corporation.
Benefit corporation versus nonprofit organization
Benefit corporations are often confused with nonprofits, but they are fundamentally different.
A benefit corporation is a for-profit entity. It can distribute profits to shareholders, raise investment capital, and be sold like other businesses. Consider a benefit corporation as a regular corporation looking to make money and be as profitable as possible. However, in addition to its profit-seeking objectives, it must pursue a mission that benefits society or stakeholders beyond its shareholders (though the mission need not be charitable).
A nonprofit organization does not have owners and generally cannot distribute profits to individuals. Its assets are dedicated to a charitable or public purpose. In other words, a nonprofit organization’s mission is to work towards a certain cause or mission and contribute to that mission. The assets and property they acquire should be limited to what is needed to achieve their mission and, in the end, the profits they generate should be attributed to that mission.
For example, a benefit corporation may sell products and pay dividends, while a nonprofit reinvests surplus funds into its mission.
Benefit corporation versus social purpose corporation
The term social enterprise is often used informally to describe mission-driven businesses. However, social enterprise is not always a legal classification.
While a benefit corporation and a social purpose corporation both pursue profits, a benefit corporation is a legally recognized structure with defined obligations and protections, while a social purpose corporation may simply be a traditional business with a socially conscious mission.
In essence, a benefit corporation will have stricter obligations than a social purpose corporation. For example, a benefit corporation requires a broader, third-party-verified “general public benefit,” while a social purpose corporation allows a more flexible social goal, relying on internal management analysis rather than an independent third-party assessment.
Choosing benefit corporation status provides legal backing for the company’s values rather than relying solely on branding or internal policies.
When a benefit corporation makes sense
A benefit corporation may be a good fit if you want to embed social or environmental goals into your company’s legal foundation. This type of entity is often chosen by founders who want to protect the mission of the business over time, especially as the company grows or takes on investors.
The founder of a corporation may wish to pursue environmentally friendly initiatives. However, if the corporation is acquired, the new owners may shift this mission. To ensure that the corporation’s mission remains a priority over time, the founder may incorporate the business as a benefit corporation, so that any future acquirers must formally consider environmental factors in their decision.
For example, if you want to ensure future leadership cannot abandon the company’s core values in pursuit of short-term profits, benefit corporation status can help reinforce that commitment.
Common misconceptions about benefit corporations
One common misconception is that benefit corporations cannot be profitable. In reality, they are designed to operate as for-profit businesses just like any other corporation. However, they have an additional “purpose” or “mission” to achieve that is not necessarily related to profit maximization.
Another misunderstanding is the assumption that benefit corporations receive special tax advantages. In most cases, they are taxed like traditional corporations. A benefit corporation must be designated as either a C Corporation or an S Corporation for tax purposes. This is essentially the same thing as a regular corporation. The primary difference lies in governance and purpose, not tax treatment.
Takeaways
In this article, we have looked over the key aspects related to benefit corporations. In summary, here is what you should consider:
- A benefit corporation is a for-profit corporation with a public benefit purpose
- It balances profit with social impact
- Directors must consider stakeholders, not just shareholders
- Benefit corporations offer the same liability protection as other corporations
- Transparency and reporting are key features of the structure
A benefit corporation allows you to align your business goals with your values in a legally meaningful way. If you want to build a company that measures success by both profit and positive impact, this structure may be worth serious consideration.
We regularly write on corporate structures. Be sure to check out our article on what is a corporation, what is a special purpose entity, or the meaning of a de facto corporation.
