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 “Turdcules.”
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 benefit corporation.
What sets benefit corporations apart?
All corporations operate under the universal principle of shareholder primacy — 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. Delaware 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.
When is benefit corporation the right choice?
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 America, shoe brand AllBirds, crowdfunding platform Kickstarter, global higher education provider Laureate University, reusable stainless steel bottle company Klean Kanteen, and many more.
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 Trade, LEED, 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 why).
Resources to learn more
If you’re interested in taking the first steps to becoming a benefit corporation (or Certified B Corp), check out the resources below: