The business world has shifted in the last couple of decades to make room for considerations of social and environmental impact. Companies increasingly seek to demonstrate their commitments to the public good to investors, consumers, and employees. However, the traditional corporate model does not always work well to accomplish these goals. Against this backdrop has been the rise of a new organizational form — the benefit corporation.
The first state statutes allowing benefit corporations were enacted in Maryland and Vermont in 2010. In the following years, more than 30 additional states have made similar changes to their corporation law statutes. Ohio is now set to do so as well with the passage by the Ohio Senate in December 2020 of Ohio Senate Bill 21 (SB 21), which amends Ohio’s General Corporate Law (Chapter 1701 of the Ohio Revised Code) to allow for the creation and governance of benefit corporations, and is set to become effective on March 24, 2021.
What is a Benefit Corporation?
A benefit corporation is a company with a socially-minded purpose, intended to be beneficial to society as a whole. For example, Patagonia Inc. proudly proclaims that it is “in business to save our home planet” and aims to “use the resources [it has]—[its] voice, [its] business and [its] community—to do something about our climate crisis.” Patagonia is also a member of 1% for the Planet — an alliance of businesses that pledge to donate 1% of sales each year to preserve and restore the environment. While not every benefit corporation commits to donating 1% of sales to a specific cause, all have some kind of explicit social or environmental mission. Products produced by benefit corporations are also not hard to find — if you are cooking with King Arthur flour, while drinking a cup of Numi tea, wearing an outfit made by Athleta and a pair of Allbirds shoes, you’ve just used products from four different benefit corporations.
Somewhat confusingly, there are both “benefit corporations” and “Certified B Corporations,” which despite their similarity mean different things. This bulletin discusses both designations below.
Benefit Corporations in Ohio
Under current Ohio law, there are two types of corporations — corporations that are intended to generate profits for their shareholders and nonprofit corporations that are prohibited from having shareholders. Each form comes with certain benefits and drawbacks for a socially-minded company. The for-profit corporation infrastructure allows a company to generate profits, raise capital, and pay shareholders for their investments; however, the for-profit corporation will also have the pressure of prioritizing — and maximizing — shareholder profit. This problem is absent from the nonprofit corporation structure, which requires the organization to be devoted to nonprofit purposes, but a nonprofit corporation cannot have shareholders and often will struggle to raise capital for projects. The benefit corporation form is meant to blend the best of both worlds — a company may access capital markets and pay shareholders, but it must also contribute to the public good, greatly lessening the pressure to maximize profits.
Under SB 21, a benefit corporation is “a corporation that sets forth in its articles of incorporation one or more beneficial purposes among the purposes for which the corporation is formed.” Further, a beneficial purpose is defined as “seeking to have a bona fide positive effect or to reduce one or more bona fide negative effects of an artistic, charitable, cultural, economic, education, environmental, literary, medical, religious, scientific, or technological nature for the benefit of persons, entities, communities, or interests other than shareholders in their capacity as shareholders.”
A new corporation may elect to be recognized as a benefit corporation by including one or more beneficial purposes in its Articles of Incorporation. Similarly, an existing corporation, so long as the existing corporation is not publicly traded, may become a benefit corporation by amending its Articles of Incorporation to include one or more beneficial purposes. Including a beneficial purpose in Articles of Incorporation does not require the benefit corporation to prioritize the beneficial purpose above all other factors, but it does require that the beneficial purpose always be considered by the directors when decisions are made. The benefit corporation’s organizational documents can set forth an order of priorities or mechanism concerning how much weight to give different stakeholders when directors make decisions, which can require prioritizing the mission over any other consideration.
Being organized as a benefit corporation makes clear to shareholders that a corporation intends to consider the impact of its activities on all stakeholders. In other words, how does the corporation’s activities impact the community, the environment, and the corporation’s employees — not just the shareholders. Such consideration may, and often does, lead to different decisions than when viewing a company’s activities through the lens of profit maximization. In theory, an investor deciding to deploy capital through a benefit corporation is attracted by the company’s mission and understands that the company will not seek profit maximization without considering other factors. Should a conflict between the shareholder and the benefit corporation arise concerning a financial decision that may have resulted in lower profits because the company chose to prioritize its mission, the fact of incorporation as a benefit corporation should provide the entity some liability protection if a shareholder were to bring a lawsuit. However, because the benefit corporation form is so new and state statutes vary, there is little precedent at this point as to how this works in practice.
Ohio’s law will generally follow the model benefit corporation statute. One notable difference between Ohio’s law and the model statute concerns required reporting to shareholders. Many states that have enacted benefit corporation legislation, and the model act, require shareholders in benefit corporations to receive periodic disclosures and reports concerning the entity’s activities and impact related to the corporation’s beneficial purposes. Ohio’s law will take a somewhat different approach — such reports and disclosures will be required only if the Articles of Incorporation, Code of Regulations, or other written agreement of the shareholders require them.
What is a Certified B Corporation?
Under Ohio’s law — as well as the model act and the laws of most states which allow for benefit corporations — a beneficial purpose can be articulated in a fairly vague way. It can also be difficult to gauge the real-world impact of a company’s beneficial purpose, and while a benefit corporation’s board of directors is required to consider the company’s mission and beneficial purpose when making decisions, it is not required to give it any specific weight or priority — unless the governing documents say otherwise. Investors driven by an organization’s mission also may want assurance that the mission is being accomplished, but may not have the tools to make that determination. Accordingly, B Lab, a nonprofit organization, created a vetting and evaluation process to determine whether a company effectively contributes to the public good, resulting in the designation of “Certified B Corporation.”
Much like being a nonprofit corporation does not automatically make an organization a tax-exempt entity, being organized as a benefit corporation under state law does not automatically qualify the organization as a Certified B Corporation. Like the nonprofit petitioning the Internal Revenue Service, the organization — which is not required to be organized as a benefit corporation — must petition B Lab for evaluation and certification. The main categories of assessment are:
(i) Measurable social performance;
(iii) Transparency; and
(iv) Measurable environmental performance.
Unlike the tax-exempt determination only undertaken once, a company must be certified every two years. Being a Certified B Corporation allows a company to include such designation on its product labeling, which may influence consumer purchases.
Should Your Company Consider Being a Benefit Corporation or Seeking B Corp Certification?
Whether or not your company should consider organization as a benefit corporation or undergoing the certification process should be based on careful consideration of a number of factors. Taft has extensive experience working with organizations considering these issues. If you have questions, please contact a member of our Socially Responsible Business and Impact Investing group.