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Benefit corporations (and social enterprise) are going strong

Posted by Chad O'Connor  July 18, 2013 11:00 AM

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As of December 1, 2012, Benefit Corporations (“B corps”) became an available entity type in Massachusetts (MGL 156e). If you haven’t been following the movement B corps “are a new type of corporation which uses the power of business to solve social and environmental problems.

When I wrote my first blog on the subject in 2010 (exploring pros and cons), the Benefit Corporation designation was only a third party designation granted by B Lab, a non-profit group. Since that time B Lab has been busy working with states to create an actual benefit corporation structure that includes state mandated transparency and accountability. Now B corps have been approved in 14 states. (Breaking News: Delaware’s Governor, Jack Markell, enacted benefit corporation legislation on July 17th, 2013. Delaware is seen as the leader in setting corporate laws and policy, and is considered to be the most attractive venue for investors and international business. This is a big step towards taking social enterprise from the fringe to the norm. You can read the press release here.)

What does it mean to be a B corp in Massachusetts?
A B corp isn’t getting any breaks. It is treated exactly like any other corporation, including taxation and corporate governance requirements. Where it mainly differs is:

1. In the articles of organization the company must state that it will provide a general benefit to the public. If the company wants, it can state a specific benefit that it will be providing, but the company is still required to provide a general benefit as well as the specific one you have in your charter.

2. The company must have an independent director known as the Benefits Director and they are responsible for monitoring the company’s beneficial activities and preparing the yearly Benefit Report. Benefit Directors cannot own more than 5% of the equity of the company and they cannot have been employed by the company for at least one year prior to their being a director. (if you are a professional corporation this requirements is waived).

3. The Benefit Report is due with the company’s annual statement each year. It is supposed to be a narrative description of the activities and progress the company has made towards their public benefit initiatives and an accounting of their overall social and environmental performance measured against a third party standard.

What companies are good candidates to be a B corp?
Every Company! Ideally B corps will become the norm and every company will be a good corporate citizen. Any business has the ability to provide a benefit through charitable activities; employee benefit plans and perks, sustainable operations practices, etc. At the moment social enterprises are set up to be the most successful as B corps due to the cultural and economic alignment.

As examples, South Mountain Company and Zero Energy Design showed up at the Secretary of State’s office to convert to B corps on the first day allowable. Both of these companies are involved in sustainable design and architecture. South Mountain Company is also an employee owned Co-Op and both companies are engaged in community activities that go beyond their revenue producing activities. Dancing Deer Baking Company, has a philanthropic focus and also converted.

How do you form a B Corp?
If your company is brand new, you can form directly as a B corp with the Secretary of State. If the company already exists, then you can convert. Converting requires filing Articles of Amendment for your Articles of Organization and of course, the requisite shareholder votes. The filing fees are low for amendments, making it relatively easy to get started on your CSR.

Downsides of the Massachusetts B Corp
1. There is no modifier to your name. You don’t get to call yourself “XYZ, B Corp” or “ XYZ BINC.” (which I would sooo call my company! Ha, BINC.) This means that you don’t have anything readily alerting consumers about your B corp status, so you still have to do the marketing and education for it, so that people know you are an option if they prefer to support benefit creating businesses.

2. The Benefit report is a little nebulous. What is really supposed to go into that report and the third party standard required for comparison is still undefined. The minimum requirements for complying with the statute are also unknown. Exactly how much of a benefit must a company provide in order to satisfy the state and what are the repercussions if they don’t?

3. The independent director can be a tricky one as well. You are most likely bringing in someone that has either never been a part of your company or hasn’t been involved for at least a year. What is this director responsible for? Do they get to vote in on every vote as a normal director would? (so far it looks like yes). What exactly are their duties and can you modify/expand upon those in the by-laws?

4. What about buyer’s remorse? Once you are a B corp, you can’t just back out easily. You have made a commitment to the state, to your shareholders, and to your community. It isn’t impossible; you can amend your articles again to remove the pertinent language and resulting responsibilities, but it takes a super majority vote of your shareholders to approve it.

This is a new entity type, so there is always a level of first mover disadvantage, but the state and public are supporting this movement. Companies can make a profit and be a productive, not destructive, force in their communities, so the upside of being a trail blazer should as usual, more than make up for these initial risks.

What’s next?
For years, I have been rooting for an LLC counterpart to be added to the Benefit Corporation movement. The L3C is picking up steam and currently being considered by Massachusetts, but it has a different aim than the B corp. B Lab has stayed away from the LLC because of the flexibility inherent in its structure.

Corporations are a “creature of statute”, meaning that longstanding law dictates how a corporation operates, which is what makes the legislative implementation of the B corp so important.

An LLC on the other hand is a “creature of contract”, meaning that you can write whatever you want into your articles and operating agreement about your mission or agenda without potentially violating your owner’s rights under corporate law.

That being said, there is no public transparency or state accountability with a private contract between the LLC’s owners. So an LLC could say it will provide a benefit, but not have to file a report or face consequences from the state if they don’t. Illinois recently passed the Benefit Corporation legislation and has new legislation pending for the first Benefit LLC. Come on Massachusetts! Are you going to let Illinois be more progressive than you?

In the meantime, keep an eye out for local B corps!

Jessica Manganello is an Attorney & Managing Member at New Leaf Legal, LLC, a law firm serving entrepreneurs, socially-minded businesses, and artists.

This blog is not written or edited by Boston.com or the Boston Globe.
The author is solely responsible for the content.

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