Article

Is There a Legal Benefit to Forming a B Corporation?

In the past few years, seven states, including California and New York, have passed legislation authorizing the incorporation of so-called “benefit” or “B” corporations. See Cal. Corp. Code §§ 14600 to 14631; N.Y. Bus. Corp. Law §§ 1701 to 1709. Many commentators and media outlets have portrayed B corporation status as a useful tool in marketing a company’s products and/or services to consumers. But is there any real legal benefit to forming as a B corporation? In a new corporation having only a handful of shareholders, the answer is plainly no. Indeed, from a legal standpoint, the additional burdens of doing business as a B corporation may outweigh any perceived benefit.

To start at the beginning, what exactly is a B corporation? A B corporation is nothing more than a corporation organized under a state’s existing business corporation statute that has elected to become subject to additional rules applicable only to B corporations. See Cal. Corp. Code § 14601(a); N.Y. Bus. Corp. Law § 1702(a). For example, just like a standard business corporation, a B corporation is formed by filing articles (or a certificate, depending on the state) of incorporation with the state, except that the articles/certificate must also state that the corporation is a “benefit corporation.” See Cal. Corp. Code § 14602; N.Y. Bus. Corp. Law § 1703; see also Cal. Corp. Code § 14631 (face of share certificates must contain, in addition to any other statements required by the state’s corporation law, conspicuous language indicating that the entity is a “benefit corporation”); N.Y. Bus. Corp. Law § 1709 (same).

The fundamental difference between a B corporation and a standard business corporation is that, while a standard corporation is formed with the purpose of engaging in any legal business activity, with the aim of making a profit for its shareholders, a benefit corporation must have an additional purpose of creating “general public benefit.” Cal. Corp. Code § 14610(a); N.Y. Bus. Corp. Law § 1706(a). “General public benefit” is “a material positive impact on society and the environment, taken as a whole, as assessed against a third-party standard, from the business and operations of a benefit corporation.” Cal. Corp. Code § 14601(c); accord N.Y. Bus. Corp. Law § 1702(b). Under California law, the additional purpose of creating general public benefit “may be a limitation on” the corporation’s business activity. Cal. Corp. Code § 14610(a). The New York statute goes even further, providing that a B corporation’s purpose of creating general public benefit “shall be a limitation on the other purposes of the benefit corporation, and shall control over any inconsistent purpose of the benefit corporation.” N.Y. Bus. Corp. Law § 1706(a). Under this provision, it is possible that a New York B corporation might be hamstrung in some of its profit-seeking activities to the extent that they can be considered inconsistent with the corporation’s purpose of creating general public benefit.

A B corporation may also choose to identify one or more “specific public benefits” that it is the purpose of the corporation to create in addition to general public benefit. See Cal. Corp. Code § 14610(b); N.Y. Bus. Corp. Law § 1706(b). The identification of one or more specific public benefits—such as “providing low-income or underserved individuals or communities with beneficial products or services,” “preserving the environment,” and “improving human health,” Cal. Corp. Code § 14601(e); N.Y. Bus. Corp. Law § 1702(e)—does not limit a B corporation’s obligation to create general public benefit, Cal. Corp. Code § 14610(b); N.Y. Bus. Corp. Law § 1706(b).

The primary legal benefit of forming a B corporation is seen as allowing officers and directors to factor into their decisions the interests of society and the environment in addition to shareholders’ financial interests, without fear of being sued for a breach of fiduciary duty. To that end, the B corporation statutes provide that, in discharging their duties, officers and directors shall consider the effects of any contemplated action upon the corporation’s shareholders, its employees and those of its subsidiaries and suppliers, the interests of customers, community and societal considerations, and the local and global environment, among other things. See Cal. Corp. Code §§ 14620(b), 14622(a); N.Y. Bus. Corp. Law § 1707(a). California even goes so far as to eliminate the potential liability for monetary damages of an officer or director who performs his or her duties in compliance with this law. See Cal. Corp. Code §§ 14620(g), 14622(c).

This would obviously be a substantial benefit to officers and directors in a large corporation like Walt Disney if it suddenly decided, much to the displeasure of its shareholders, to elevate societal and environmental interests to equal footing in the decision-making process with turning a profit. But in a small corporation with just a few shareholders who are likely to be on the same page with regard to the corporation’s purposes, what is the likelihood that one shareholder will sue another for abusing his authority in that regard, especially when all of the shareholders are likely serving as the corporation’s officers and directors as well?

This unlikely benefit in a small B corporation must be measured against the substantial downside in the form of increased reporting burdens. B corporation statutes require B corporations to produce an annual “benefit report” that, among other things, describes the ways in which the corporation pursued a general public benefit and any special public benefit(s) during the preceding year, and (2) assesses the corporation’s performance relative to achieving such benefit(s) assessed against a third-party standard. See Cal. Corp. Code § 14630; N.Y. Bus. Corp. Law § 1708; see also Cal. Corp. Code § 14601(g) (definition of “third-party standard”); N.Y. Bus. Corp. Law § 1702(g) (same). While such a report is, again, purported to be of some marketing value, there is no doubting the legal burden imposed. Given the questionable value in a small B corporation with few shareholders of insulating directors/shareholders from suing each theory for failing to maximize shareholder profits, this increased reporting burden creates a serious question as to the legal benefit of forming a B corporation when starting up a new enterprise with only a handful of shareholders.