What is a Benefit Corporation?

Benefit corporations have a mission beyond making a profit.

By , Attorney · Penn State Dickinson School of Law

A benefit corporation is a business entity with a dual purpose: making a profit and promoting the public good. While a for-profit corporation's sole purpose is to make a profit for its shareholders, and a nonprofit's purpose is to fulfill its mission or support its beneficiaries (such as promoting environmental sustainability or serving low-income individuals), a benefit corporation engages in both. Directors of benefit corporations must report to their shareholders (and in some states to the public) on how they are fulfilling their public benefit purpose.

Before you decide to form a benefit corporation, check with your state's laws. Not every state recognizes benefit corporations, and some require additional paperwork and annual reports. If the benefit corporation entity is available, you can form a new benefit corporation from scratch; and if you already have a for-profit corporation, you can convert it with the approval of your shareholders.

Comparing Benefit Corporations to For-Profit Corporations

In many ways, benefit corporations are similar to for-profit corporations. In both, the shareholders are the owners and the board of directors oversee the direction of the business. Both entities pay corporate income tax and file the same annual tax returns. As discussed below, the process for forming a benefit corporation is similar to a for-profit corporation.

Benefit corporations are different from for-profit corporations in terms of their purpose. In the former, the business's sole purpose is to make a profit. The directors are legally required to put the interests of the stockholders first, which means making decisions that maximize profits (within the bounds of the law and fair dealing). In a benefit corporation, although one of the business's purposes is to make a profit, it has a second purpose that serves the public.

Here's an example. Let's say you own a furniture company and you have the option to use recycled materials in manufacturing your sofas. If you have a for-profit corporation and the board of directors finds that using recycled materials means less profit, the board would have to vote against it because it would not be in the best interests of the shareholders. By contrast, if your company is a benefit corporation and one of your purposes is environmental sustainability, the board could recommend the use of recycled materials, even if it hurts the bottom line.

To help it make decisions, the board can create policies on how it will balance the sometimes competing interests of profits and the public good. For instance, the organization might set aside 5% of sales to contribute to a charitable cause, or set a goal of using 50% recycled materials in its products. Once the business meets the stated goals, the board will make decisions that maximize profits.

Qualifications for Benefit Corporations

To qualify as a benefit corporation, your company must have a public benefit purpose and commit to creating annual reports that show your progress towards your stated mission. Your formation documents must include a statement of one or more public benefit purposes, such as:

  • serving low-income individuals or communities
  • environmental sustainability
  • promotion of arts or music
  • sharing profits with charities
  • contributions to scientific research
  • advancement of public education, or
  • a general public benefit purpose (such as a positive impact on society).

Many states require benefit corporations to produce annual reports on their overall social and environmental performance. The report must be available to the corporation's shareholders, and in some states, to the public.

Advantages Benefit Corporations

Some of the advantages you will enjoy if you form a benefit corporation include:

  • Furthering the public good: The main reason to form a benefit corporation is to further a public benefit that is meaningful to you and to help ensure that your mission lives on after you and other owners leave the corporation.
  • Taking home a profit: In a benefit corporation, the company distributes profits to its shareholders. By contrast, if you form a nonprofit corporation, you cannot distribute profits to the owners (apart from reasonable salaries).
  • Attracting customers and employees: Benefit corporations can attract devoted customers and employees, who are drawn to the corporation's mission.
  • Other benefits of traditional corporations: Benefit corporations enjoy the perks of traditional corporations, such as limited liability and tax deductions.

Disadvantages of Benefit Corporations

A benefit corporation is not the best choice for every business. Some of the disadvantages you should consider include:

  • Not available in every state: Not every state recognizes benefit corporations. If you cannot form a benefit corporation in your home state, you can explore out-of-state registration. Consult with an attorney to determine if this option is available for your business.
  • Not available for every business: Not every type of business can register as a benefit corporation. For example, if you own a professional business, such as a law firm or an accounting firm, you likely cannot form a benefit corporation (you can instead form a professional corporation).
  • Less profit: In some cases, promoting the public good means less profit for your shareholders.
  • More formalities and paperwork: Compared to other entities like LLCs and partnerships, benefit corporations are more challenging to form and maintain. You must maintain a board of directors, submit state filings, and produce annual reports.

How to Form a Benefit Corporation

The process for forming a benefit corporation is similar to creating a for-profit corporation. The steps include:

  • Select a business name.
  • Form a board of directors.
  • File articles of incorporation (also known as a certificate of formation) with the state and pay a filing fee. Your formation documents must specify that you are forming a benefit corporation.
  • Draft bylaws.
  • Apply for business licenses.
  • Register with tax agencies.

View our articles on corporations for more information on forming a corporation in your state.

Converting an Existing Business to a Benefit Corporation

If you own a for-profit corporation and your state recognizes benefit corporations, you can convert the business. Typically, you must gain approval from your shareholders and board of directors. You will then file amended articles of incorporation with your state and pay a filing fee. Converting to a benefit corporation is more complicated when you own a nonprofit corporation, LLC, or other business type. Consult with an attorney in your state for more information.

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