Benefit Corporation White Paper: The Need and Rationale for the Benefit Corporation

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This article was authored by B Revolution Founder Dirk Sampselle with other B Lab staff and volunteers in 2011 (Dirk served as a volunteer in B Lab’s policy team 2010-2011).

Executive Summary

There is significant interest in state legislatures and bar associations across the United States regarding legislation to introduce a new type of corporate legal entity – the benefit corporation.  Legislation establishing the benefit corporation as a new type of corporate entity has already been passed and signed into law in California, Hawaii, Illinois, Louisiana, Massachusetts, Maryland, New Jersey, Pennsylvania, South Carolina, Vermont, and Virginia and has been introduced in several other states.

The sustainable business movement, impact investing and social enterprise sectors are developing rapidly but are constrained by an outdated legal framework that is not equipped to accommodate for-profit entities whose social benefit purpose is central to their existence.  The benefit corporation is the most comprehensive yet flexible legal entity devised to address the needs of entrepreneurs and investors and, ultimately, the general public.  Benefit corporations offer clear market differentiation, broad legal protection to directors and officers, expanded shareholder rights, and greater access to capital than current alternative approaches.  As a result, the benefit corporation is also attracting broad support from entrepreneurs, investors, legal experts, citizens, and policy makers interested in new corporate form legislation.

The major characteristics of the benefit corporation form are:  1) a requirement that a benefit corporation must have a corporate purpose to create a material positive impact on society and the environment; 2) an expansion of the duties of directors to require consideration of non-financial stakeholders as well as the financial interests of shareholders; and 3) an obligation  to report on its overall social and environmental performance using a comprehensive, credible, independent and transparent third-party standard.  The enacting state’s benefit corporation statutes are placed within existing state corporation codes so that the enacting state’s existing corporation code applies to benefit corporations in every respect except those explicit provisions unique in the benefit corporation form.

The purpose of this white paper is to set out the need and rationale for this legislative initiative.  The paper includes a brief discussion of demand in the market by business leaders and investors, an analysis of why current legal frameworks do not accommodate the activities of mission-driven private sector entities, a discussion of the benefit corporation form, why the model legislation is drafted the way it is and why it is the legal form that best addresses the needs of social entrepreneurs, investors and, ultimately, the public.