Do Good or Make Money? Benefit Corporations Have it Both Ways

It used to be that the business world was divided in a binary manner: for-profit companies on the one side, nonprofits on the other. A company’s purpose was either to make the most money or to do the most good, and entrepreneurs who wanted to seek profits but also act in a socially responsible way had a hard time defending their business practice against shareholder interests. As an answer to this dilemma many states have established new subtypes of traditional business corporations that enable entrepreneurs to have it both ways.

In California, two new structures became legal in 2012: Benefit Corporations and Flexible Purpose Corporations. Made for entrepreneurs who want to truly commit themselves to environmental or social sustainability, Benefit Corporations must follow strict rules. By law, these entities are required to pursue “a general public benefit.” They must prove that they create “a material positive impact on society and the environment taken as a whole,” and supply their shareholders with such proof annually. The assessment has to be measured against a self-adopted third-party standard. Like all other corporations, Benefit Corporations must provide economic benefits to their shareholders, but their officers and managers must also consider the effect of their policies on the long-term interests of the company, on the community, and on the local, regional and global environment. The first California company to commit to this split, in January 2012, was the Ventura based outdoor gear provider Patagonia. At least 180 other businesses have followed suit since then. (Side note: Benefit Corporations should not be confused with B Corporations. The latter term doesn’t denote a legal entity but a certification for businesses that meet specific social and environmental standards. Any company, regardless of its legal structure, can apply for the certification which is conferred by the nonprofit organization B Lab.)

For entrepreneurs who are not quite as dedicated and want a more narrow sustainability focus, the state of California has also created the more relaxed Flexible Purpose Corporation. With this type of business there is no need to prepare assessments based on third-party standards, and the rules allow companies to pursue any number of specific purposes that positively impact either people (employees, creditors, customers, suppliers,) the environment or the community and society. As with Benefit Corporations, directors and managers cannot be held liable for making decisions that align with the stated special purpose(s) but won’t necessarily maximize profit.

Both Benefit Corporations and Flexible Purpose Corporations are young creations. It is still too early to say how popular the new entities will become or how the courts will decide in cases where shareholder interests conflict with a company’s stated purpose to do good. But one thing is clear: Consumers’ calls for corporate accountability are growing louder by the day, and more and more people are willing to spend their money in line with their values. With the new business types, entrepreneurs can capitalize on this trend.

By Kevin J. Moore