Is the Benefit Corporation Really Such a Big Deal?
Allen Bromberger, Perlman + Perlman

On April 13, 2010 , the Governor of Maryland signed a law creating a new legal form called a “Benefit” corporation. A few weeks later, Vermont followed suit and passed a similar law. Essentially a business corporation, fully taxed and operated for the benefit of its shareholders, the benefit corporation law also allows the founders to embed a social or public purpose into the corporate charter. Once that is done, the board of directors has an affirmative duty to create profit and to pursue the social or public mission at the same time. The board not only has to issue financial statements, but they also have to report on the activities they have conducted to accomplish their social or public mission. And they have to be certified by an independent body of their choosing. Seasoned corporate lawyers will immediately see the problems inherent in this new model. But is the “Benefit” corporation really such a big deal?
 
In a word, yes. Under traditional corporate jurisprudence, a corporation is formed to benefit its shareholders by producing profit. This  sometimes referred to as “shareholder primacy.” Courts have historically viewed the interests of the shareholders in primarily economic terms. Other factors, such as having the company behave in a social responsible manner, paying employees a fair wage and providing them good benefits, looking out for the interests of suppliers and even customers, play only a indirect or peripheral role: they cannot be the board’s main concern. This can be true even where the shareholders themselves have declared non-economic factors to be part of their interest as owners and investors through a shareholders’ agreement or similar document. In other words, it is the corporate law itself that imposes a limited and myopic view of corporate governance. There is nothing in the nature of corporations that compels this.
 
In fact, the rule is almost completely the opposite for nonprofit corporations. Nonprofit corporations are formed for the purpose of accomplishing a “mission”, and their ability to reward and enrich individuals along the way is very constrained. This is even more true for nonprofit corporations that are exempt from tax under Section 501(c)(3) if the Internal Revenue Code, commonly referred to as “charities.” The board of a charity is supposed to focus primarily on accomplishing its charitable and educational mission, and although a charity can pay “reasonable” compensation for services rendered, enrichment of individuals is forbidden, and the board breaches its duty to the corporation if it allows the corporation to be used for improper private gain.
 
This is a big problem for social entrepreneurs who want to “do good and do well” at the same time. The law essentially forces them to choose. But the Benefit corporation offers the chance to do both.
 
You see,  for-profit companies and nonprofit companies each have a single purpose: profit or mission. A Benefit corporation, by contrast, has two priorities: profit and mission. This forces the board to look beyond mere profit (or mission) in making decisions. It now has to balance the two and deliver public benefit and private benefit at the same time. For traditional businesses and traditional charities, this won’t work. But for a new breed of companies that want to do both, see a way to do both, and have investors and owners who are committed to doing both, the new form offers something unique.
 
Of course, the new form isn’t perfect, and I personally expect to see it attacked from several directions. Traditionalists on both the business and charity sides will attack it as being confusing and will point out many technical aspects of corporate and tax law that simply don’t apply very well to such a structure. Proponents of other approaches will attack it for being ill-conceived and poorly written (presumably in contrast to their own models.) Academics will complain that it is imprecise and that there is no legal authority to support its basic premises. Donors will complain that contributions aren’t tax deductible. Investors will complain that the lack of shareholder primacy allows the corporation’s board to ignore their interests in favor of some touchy-feely social mission. And so forth.
 
All of these complaints are valid. The Benefit corporation is new, and it is untested. It does break the mold and turn traditional jurisprudence on its head. As of yet, there are no standards of best practice; no norms of behavior. Nobody even knows how such a beast will be regulated, and whose interests will prevail when conflict occurs.
 
But I’m excited. I say bring it on. This law may be new and “outside the box,” but it has substance and it’s more than just another branding exercise. Besides, the same things were said about the LLC when it was first created in 1977. The same things were said were said about cooperatives and ESOPS when they were created. And their critics were right – at first. But eventually the law adapted to the new forms, and because they filled a true economic and legal need, they eventually gained wide popularity. Courts made rulings, governments issued laws and regulations to refine the boundaries of permissible behavior, and the public simply got used to a new and different way of doing things. Maybe the same thing will happen here. I don’t know. But I do know that the existing models of charity and business start to break down when we talk about making business socially responsible, and when we talk about moving nonprofits to a market-oriented, economically sustainable place. Call me a heretic, but I think the country needs something like this right now. The question is: are we ready?

Allen Bromberger is a partner at Perlman +Perlman and has over 20 years experience representing nonprofit organizations in a wide variety of business matters and legal transactions. His practice focuses on social enterprise corporate philanthropy—“hybrid” legal structures and arrangements that allow the pursuit of economic and social goals simultaneously.

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