Whatâ€™s the benefit to being a Benefit Company?
By: Cameron Soran
Starting January 2014, Oregon businesses may elect to take on the corporate form of a benefit company.
This new legal entity is part of the growing movement in the Oregon business community concerned with social and environmental responsibility â€“ in addition to the bottom line. While benefit companies are not for every emerging or existing business, they are an attractive option for business owners and shareholders who wish to include improving social and environmental outcomes as part of their business plan.
What is a Benefit Company?
A benefit company (sometimes called a â€śB-Corpâ€ť) is a corporate form designed for for-profit entities, such as LLCs, PCs, and S-Corps. (HB 2296, Section 3, Section 5 (3)). Benefit companies must include in their articles of incorporation or organization a commitment to have a â€śmaterial positive impact on society and the environment.â€ť (HB 2296, Section 1). This commitment is measured from an objective third-party standard, and the new legislation even goes so far as to require benefit companies to prepare a report freely available to the public describing the positive impact the company had on society for each fiscal year. (HB 2296, Section 10). These measures are intended to improve the transparency of benefit companiesâ€™ commitment to their triple bottom line ethic: profits, society, and the environment.
Why choose to become one?
Under traditional principles of business law, a director, officer, or manager who puts the interests of society or the environment before profit margins could be liable for breaching their fiduciary duty to the owners (or co-owners) of the company. In perhaps the most famous example, the Court in Dodge v. Ford Motor Co. ruled that Henry Ford breached his fiduciary duty by paying employees more than necessary, which reduced the profits of the shareholders. Dodge v. Ford Motor Co., 170 N.W. 668 (Mich. 1919)
A benefit company, however, allows business managers to have motives other than maximizing shareholder profits. (HB 2296, Section 6). That is not to suggest officers of a benefit company can completely ignore the bottom line, but rather that they have greater freedom to choose positive societal outcomes over profit margins. As this is a relatively novel entity (benefit companies first became a valid legal entity in the U.S. in 2010, when Maryland passed SB 690/HB 1009), the appropriate balance between these two goals â€“ profit margins and a positive impact on society â€“ is not well-established. Any business considering becoming a benefit company should discuss this point in greater detail with an attorney, and appropriately memorialize the goals and missions that establish them as a benefit company.
Any company that operates (or plans to) with more than just the bottom line in mind, and doesnâ€™t object to the annual report requirement, should consider becoming a benefit company.
What a benefit company is not?
There are several things a benefit company is not. For starters, it is not a non-profit entity. Rather, it is a special legal status that for-profit companies may elect to become. Second, since a benefit company is a for-profit, it cannot ignore the financial interests of its shareholders. It only allows for-profit companies to consider the positive social and environmental impact of its actions in addition to financial success. Third, there are no special tax advantages to a benefit company. The tax status of the company will remain the same after becoming a benefit company. Finally, there are no public contracting benefits to becoming a benefit company.
How does it work?
Setting up a new organization as a benefit company isnâ€™t that different from organizing and forming a business entity under existing law. Except that in the organizationâ€™s formation documents, the statutorily required language must be included.
Converting an existing organization to a Benefit Company would require amending the organization documents (for instance, for a corporation, the Articles of Incorporation, for an LLC, the Articles of Organization).
Operating a benefit company is slightly different in one respect. A benefit companies must appoint a â€śgovernorâ€ť â€“ essentially the manager of the Benefit Company. (HB 2296, Section 7). In particular, HB 2296 requires that when business decisions are made, the governor must consider not just the profit to owners or shareholders but also the impact on, among others:
- The employees and work force of the benefit company and the employees and work force of the benefit company's subsidiaries and suppliers;
- Subsidiaries and suppliers;
- Communities in which the benefit company is located;
- Local and global environment;
- Short and long-term interests of the benefit company;
- The benefit companyâ€™s ability to fulfill its purpose, including any specific public benefit identified in the companyâ€™s organizing documents. (HB 2296, Section 6).
In perhaps the most interesting part of Oregonâ€™s new legislation on benefit companies, co-owners and shareholders of the company may file suit to compel the managers, governor, and the company itself to act in accordance with the benefit companyâ€™s commitment to provide a positive impact on society and the environment. (HB 2296, Section 9). In other words, Oregon lawmakers were not satisfied in just allowing businesses to take on a laudatory status symbol without giving the law some teeth to make it meaningful.
One only has to compare these transparent and legally enforceable requirements a Benefit Company must abide by with the legion of companies that tout their â€śgreenâ€ť products or processes that are merely empty advertising campaigns to see how becoming a benefit company might become a serious market differentiator for many businesses.
Becoming a Benefit Company
Are you a businessperson who is serious about running your company taking into account not just profits, but the return you provide to your community? And are you willing (or maybe even anxious) to disclose to the public your positive impact on your community? If so, then speak with an experienced business attorney as soon as possible.
The Harris VelĂˇzquez Gibbens has been assisting business clients resolve their legal issues for over 25 years.