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The rise of the benefit corporation is in direct response to shareholder primacy. Under benefit corporation frameworks governed by state law, corporations that operate according to a “doing well by doing good” ethos may be shielded from a range of acquisition tactics and shareholder suits.
In the summer of 2017, two friends and I were seated around a table in a 24-hour
donut shop. It was just past one in the morning; and, in the midst of glazes and
sprinkles — and powered by bad coffee — we were launching a new company. Perhaps
predictably, given the circumstances, our new venture would be called
Originating in rural Tennessee, and flavored by my background on the West coast
in corporate social responsibility, Turdcules was to be a social enterprise
concerning residential septic systems. In particular, our company would offer
subscriptions of proprietary and eco-friendly cleaner packets to rival a certain
ubiquitous market standard — let’s call it product X. For each packet
subscription sold, we would provide product to a nonprofit partner for
distribution to rural Appalachian communities, where byproducts of improperly
maintained lines often overwhelm family finances.
The business was slow to grow as we tested different development approaches; and
ultimately, we took on active investors who steered the company in a different
direction. This was a good thing in that the company was able to grow with a new
vision and optimized execution, but it meant departing from the social-impact
foundation and goals of the company. Today, you’ll find
Turdcules as a male-oriented “toilet elixir” found in
more than 1,000 stores (we’re the guys $300M Poo-Pourri likes to refer to
as the “crass bearded men”).
Fortunately, we founders were able to pivot with the new direction for Turdcules
and spin out the original idea as a separate company — a win-win.
Unfortunately, our story is unique. For every Turdcules, there may be 10
companies whose investors or decision-makers eliminate social impact altogether
when faced with adversity. One way a company can avoid potential seismic shifts
in culture and mission is by organizing and operating as a benefit LLC or
All corporations operate under the universal principle of shareholder
that is, corporate directors are elected by corporate shareholders; and
directors managing the corporation must, above all else, provide a financial
return to shareholders.
An unfortunate byproduct of shareholder primacy is that the doctrine limits the
ability of corporate management to, at times, esteem its employees and
sustainability metrics; or to measure the social consequences of its practices,
if such estimation or measurement endangers stockholder return. This is
admittedly an oversimplification, but not an egregious one. Time and time again,
corporations have been prevented through derivative suits from, say, paying
employees higher wages at the expense of issuing dividends to shareholders.
The rise of the benefit corporation is in direct response to shareholder
primacy. Under benefit corporation frameworks governed by state law,
corporations that operate according to a “doing well by doing good” ethos may be
shielded from a range of acquisition tactics and shareholder suits. Generally
speaking, a benefit corporation is a form of corporation and may or may not need
a board of directors — depending upon size, investment profile and the statutory
requirements where incorporated. A newco can incorporate as a benefit
corporation in any state where legislation has been
passed; and those state laws
govern how existing corporations can elect benefit status, as well. Where an
intended benefit company is formally incorporated — e.g.
vs California — determines how the company needs to be structured and
operated, and how distinct it is from the company’s present situation.
A handful of
states allow for
benefit LLC registration, which is an increasingly relevant structure in the
wake of the JOBS Act. The 2012 JOBS Act opened the door for less regulated
equity investment in small businesses, and I continue to see a trending upwards
of LLCs taking early-equity investment instead of traditional debt from more
traditional sources, such as banks. A benefit LLC structure, ideally, helps
prevent investing LLC members from limiting the ability of LLCs to make
decisions that champion employee culture and benefits, environmental metrics,
charitable giving, and other founder and/or manager priorities.
Companies looking to protect their mission for the long haul should ensure
investors share their long-term vision; in which case, choosing the benefit
corporation structure is a good idea. Originally, the primary objective of most
companies electing benefit corporation status was to shield against shareholder
primacy. Now, many companies are interested in benefit corporation registration
for ancillary purposes — e.g. to score more points on B Corp
certification, as a messaging tool to position for
nonprofit and government customers, etc. Moreover, data is showing that benefit
corporations tend to attract better talent and scale better than their
non-benefit peers. They may even find tax advantages not otherwise available.
Benefit corps are not limited to smaller companies, by any means. The list of
well-known and highly valued benefit corporations includes Danone North
global higher education provider Laureate
University, reusable stainless steel bottle company
Klean Kanteen, and many
One important clarifying note: Benefit corporations are not the same thing as B
Corps, and they can be mutually exclusive. Whereas benefit corporations are
purely legal corporate structures, Certified B Corps are more akin to
certification standards such as Fair
or 1% for the Planet. Since my firm,
Rockridge Venture Law, is a Professional LLC sited
in states without benefit LLC laws, it is not a benefit corporation. It is,
however, a Certified B Corp (learn more about how and
If you’re interested in taking the first steps to becoming a benefit corporation
(or Certified B Corp), check out the resources below:
The Southeast Guide to B
Benefit Corporations: Why They’re All the
The Mid-Atlantic Guide to B
5 Reasons Your Startup Should Be a Benefit
Published Jan 27, 2020 1pm EST / 10am PST / 6pm GMT / 7pm CET