Over the last ten years, there’s been a sensational increase within modern-day business owners interested in using business to drive various social changes. Whereas corporations undoubtedly maintain considerable flexibility to pursue environmental and social objectives under the legal concept named the “business judgment rule”, conventional corporate law, as a rule, holds that the primary purpose of a corporation is to maximize shareholder value above all. This is most obvious during a corporation acquisition scenario when the directors are supposed to sell the company to the highest bidder and maximize the shareholders’ return.
That’s why a new corporate entity has come into existence not long ago to accommodate companies’ concerns that strive to pursue both profit and purpose – the public benefit corporation.
These business entities are becoming more and more common. As a matter of fact, there are already more than 4,000 public benefit corporations in the USA, including some of the brands you hear about every day like Kickstarter, Patagonia, and Method Products. There are also numerous examples of federal PBCs owned and operated by the government, including the US Postal Service, Amtrak, and the Corporation for Public Broadcasting. This relatively new corporate structure already exists across thirty-six U.S. states, allowing entrepreneurs to focus on both profits and beneficial impacts for society.
Still, what are PBCs? Are they profit or non-profit? Are they considered to be corporations or not? Continue reading this informative article as it will offer you a high-level overview of everything you ever wanted to know about public benefit corporations and how they work.
What Is A Public Benefit Corporation? Public benefit corporations, or just benefit corporations, are for-profit companies that balance maximizing value to shareholders with a legally binding pledge to a social or environmental mission. Contrary to other for-profit business organizations, which by law must exclusively focus on increasing shareholders’ returns, the public benefit corporation must consider some other factors.
A public benefit corporation’s charter pinpoints a public benefit, which in most cases positively affects society or reduces negative impacts that are charitable, cultural, economic, artistic, environmental, literary, educational, scientific, technological, or religious by character. When undertaking business decisions, in addition to taking into account the value to shareholders, PBCs must also contemplate other stakeholder interests, which often include the organization’s employees, clients, various communities, or the environment.
Forming a Public Benefit Corporation Even though corporation laws vary from state to state, in general, a public benefit corporation must have a general benefit purpose declared in its articles of incorporation. A B corporation is formed by depositing articles of incorporation with the state– just like for a traditional corporation.
In most states, a public benefit corporation must prove that it’s upholding its public benefit purpose by releasing an annual benefit report that evaluates environmental and social performance using a third-party standard. The annual benefit report must be forwarded to all shareholders and proclaimed on the company’s official website.
How Are the Financial Interests of Shareholders Protected? The shareholder’s interests are protected using the standard protection methods available in regular corporate models. They have all customary company governance rights like voting on company transactions like amendments or mergers and electing directors. Additionally, all the transactions that result in challenge within the company must go through a fairness evaluation. This technique ensures that company directors and administrators can never focus on their interests over the shareholders’ interests.
Advantages of Public Benefit Corporations The advantages of public benefit corporations originate primarily from the corporation structure’s altruistic purpose and include the following.
● Social and environmental good as a priority. Since its public benefits are mandated in its official paperwork, the public benefit corporations must prioritize social interest and the traditional corporate goal of creating profits.
● Directors’ and administrators’ liability. The board of directors and the companies’ top administrators can make decisions based on the company’s public benefit purpose without fear of liability, even if profit might be affected.
● For-profit organization. Contrary to non-profit organizations, the PBC is a 100% for-profit organization, just like a C corporation or a limited liability company. That means the PBC still pursues profit as one of its main motives and can participate in profit-generating activities that a non-profit organization can’t do.
● Transparency and accountability. Due to circumstances such as its public benefit purpose and legislated reporting regulations, a public benefit corporation offers the socially conscious investor or client with a strengthened level of transparency and accountability, which adds to its entire appeal.
● PBC companies attract and retain talented employees and consumers. According to the Cone Communications Millennial Employee Engagement Study, 76% of Millennials expect companies to make a public commitment to good corporate citizenship and strongly consider a company’s environmental and social obligations when deciding where to work. Consequently, 64% of the interviewed millennials said that they wouldn’t take a job if the potential employer doesn’t have healthy corporate responsibility practices. Business entities organized as a PBC can easily differentiate themselves from their competition and align their corporate values with those of their employees and consumers.
Is a Public Benefit Corporation Adequate for a Start-up? If you are asking yourself this question, the answer is: it depends. Weigh in what’s essential to you, your employees, and your start-up’s mission when determining whether you should register as a public benefit corporation. Venture capital firms and other investment entities still prefer C Corporations, but there are newer, more modern, and more conscious venture capital firms that care more about benefit corporations. Besides, there’s an annual cost of expense and time in preserving a public benefit corporation, so make sure that what you’re doing as a start-up serves some general public benefit.
Final Words Public benefit corporations are undoubtedly smart and viable options for businesses and start-ups that aspire to distinguish themselves from their fierce competitors and ensure a legal commitment to a social mission. These business organizations create a strong basis for long-term mission alignment, value creation, and add validity to the entity at the same time. Hopefully, the trend of greater acceptance of mission-driven businesses will continue to rise, and one day we’ll live and function in a world full of public benefit corporations.