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.
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.
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:
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.
Some of the advantages you will enjoy if you form a benefit corporation include:
A benefit corporation is not the best choice for every business. Some of the disadvantages you should consider include:
The process for forming a benefit corporation is similar to creating a for-profit corporation. The steps include:
View our articles on corporations for more information on forming a corporation in your state.
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.