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Incorporating as a Benefit Corporation Part 2: Talking to Legal

In part one of this series, we outlined how to talk to your shareholders when incorporating as a benefit corporation. In this second and final part, we will delve into the other important conversation to prepare for — talking to your legal team.

Where your shareholders are likely more focused on the organizational and fiscal impact, your legal department may be more interested in the official procedures to both incorporate and maintain benefit corporation status in the coming years and the legal implications of the transition. But you should be aware that we are presenting a general overview and not focusing on the laws of any particular jurisdiction. However, every benefit corporation is governed by the law of its state of incorporation. Each of those state laws is unique and must be consulted before taking any action to incorporate or maintain a benefit corporation or to determine the implication of those actions. With that in mind, here are some of the most pertinent issues your legal team may be interested in, and the facts to help guide you through this discussion:

Process:
The exact process of incorporating varies by state, but for the most part is very similar to incorporating as any other corporate form. However, benefit corporations differ from traditional corporations because of their corporate purpose, accountability and transparency:

  • Corporate purpose is to create general public benefit, which is defined as a material positive impact on society and the environment, taken as a whole, assessed against a third-party standard, from the business and operations of a benefit corporation.²
  • Accountability is ensured by requiring that directors look at the impact of their decisions on their stakeholders, not just profit. This means weighing how the decision impacts the social, environmental, and fiscal aspects of the organization.
  • Transparency includes publishing an annual public report assessing, using a third party standard, the benefit corporation's success in meeting its statutory purpose to create general public benefit. Note that this report does not need to be audited or certified by the third party. Further, these requirements can vary by state — for instance, in Delaware a report is only required once every other year, making it public is optional, and a third party standard is not required.

Liability:
Shareholders may hold the company accountable for creating a material positive impact on society and the environment. It is important to note, however, that directors do not have any personal liability for monetary damages in connection with an enforcement action brought by shareholders. Additionally, neither the government nor any third party has any legal right of action if the company does not meet its goals. For this reason, the benefit report helps keep the organization accountable. Again, this is required yearly in most states except in Delaware where it is required every other year.

Becoming a Benefit Corporation:
Any entity can become a benefit corporation. However, you will want to investigate the tax implications that accompany incorporation as a benefit corporation (taxed like a traditional corporation) as opposed to other business forms such as an LLC. In many states, forming a new company as a benefit corporation requires including a statement in the company's charter that the corporation is a benefit corporation. For a company that is already formed as a corporation, registering as a benefit corporation requires amending the organization's governing documents. Additionally, shareholders must vote to accept the change (in most states a 2/3-supermajority vote with each class of shares voting is needed. Delaware, originally required 90%, but now conforms to the more widely adopted standard of 66 2/3 %. In some states, dissenters' rights also apply).

Organizations are also required to appoint a registered public agent to receive service of process, and can help you comply with state incorporation requirements. Learn more about incorporating as a benefit corporation.

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²Note, there are some state-by-state variations to benefit corporation requirements, particularly in the area of what types of public purposes must be specified.

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