A New Kind of Business: The Benefit Corporation
By: Sarah Wladecki
In 2015, the Indiana legislature made some noteworthy changes to the Indiana Business Corporation Law ("IBCL"). In perhaps the most notable change, the legislature created a new type of business in Indiana called a "benefit corporation." Starting January 1, 2016, Indiana will allow businesses to operate toward the goal of creating general public benefit, which the Indiana Code defines as "a material positive impact on society and the environment."[i] A benefit corporation may also declare as its focus one or more specific public benefits, which are benefits that serve "one or more public welfare, religious, charitable, scientific, literary, or educational purposes" or "other purposes or benefits beyond the strict interests of the shareholders of the benefit corporation."[ii] Examples of these specific public benefits include such purposes as:
- Providing low income or underserved individuals or communities with beneficial products or services;
- Promoting economic opportunity for individuals or communities beyond the creation of jobs in the normal course of business;
- Protecting or restoring the environment;
- Improving human health;
- Promoting the arts, sciences, or advancement of knowledge;
- Increasing the flow of capital to entities with a purpose to benefit society or the environment; and
- Conferring any other particular benefit on society or the environment.[iii]
A benefit corporation may declare a specific benefit when incorporating, or it may later amend its articles to "add, amend, or delete the identification of a specific public benefit," which is helpful if the benefit corporation should later decide to change its course or purpose.[iv]
In order to become a benefit corporation, a business's articles of incorporation must expressly state that it is a benefit corporation.[v] A new business can start out as a benefit corporation, and an existing corporation can amend its articles of incorporation to become a benefit corporation.[vi] In the event that the benefit corporation's shareholders have a change of heart, a benefit corporation can terminate its status as a benefit corporation at any time by amending its articles of incorporation to delete the statement that it is a benefit corporation, resulting in the corporation becoming or reverting back to a traditional corporation.[vii]
Prior to establishing a benefit corporation or converting a traditional corporation into a benefit corporation, the shareholders must be aware of the requirements of the benefit corporation. For instance, in making decisions, the directors and officers of a benefit corporation must take into consideration the effects of actions and inactions on not only its shareholders, but also its employees, the employees of its subsidiaries, the employees of its suppliers, its customers, and the community.[viii] In addition, the directors must consider the consequences of the benefit corporation's actions or inactions in light of societal factors and the local and global environment.[ix] Note, however, that the directors are not required to give special preference to any one of those considerations unless the benefit corporation's articles of incorporation specifically state that such preference will be given.[x]
One other key difference shareholders must be aware of when establishing a benefit corporation or converting a traditional corporation into a benefit corporation is the requirement that the benefit corporation's board of directors include a "benefit director."[xi] The benefit director must be independent and must prepare a report each year to be included in the annual benefit report to shareholders.[xii] This report must include the benefit director's conclusions as to whether the benefit corporation acted in accordance with its general public benefit purpose and/or its specific public benefit purpose(s) during the covered period.[xiii] It must also state whether the benefit corporation's directors and officers complied with the benefit corporation's statutory requirements, and, if they failed to do so, describe the ways in which they failed to comply.[xiv]
Should the benefit corporation or its directors or officers fail to comply with statutory requirements, shareholders or directors may bring a claim against the benefit corporation or its directors or officers for the failure to pursue a general or specific public benefit or for a violation of the standard of conduct under Ind. Code Title 23, Article 1.3 by instituting a benefit enforcement proceeding.[xv] Such a proceeding may be commenced either directly by the benefit corporation or derivatively by directors or certain shareholders.[xvi] Notably, however, a benefit corporation is not liable for monetary damages for its failure to pursue or create a general or specific public benefit.[xvii]
In addition to the benefit director's conclusions described above, the benefit corporation's annual benefit report must also include a narrative description of the ways in which it pursued general or specific public benefits during the year.[xviii] The report must describe any circumstances that hindered the creation of the general or specific public benefits.[xix] Further, the report must have an assessment of the overall social and environmental performance of the benefit corporation against a third-party standard.[xx] Finally, the report must contain the names and addresses of the benefit director and benefit officer and the compensation of each director.[xxi] The benefit corporation must provide its annual benefit report to the public (via its website), to the Indiana Secretary of State, and to its shareholders.[xxii]
The benefit corporation differs from both a traditional C corporation and a nonprofit corporation. A traditional C corporation focuses on maximizing gains for its shareholders, while a benefit corporation focuses on social or environmental goals in addition to making a profit. Further, unlike in a traditional corporation, the officers and directors of a benefit corporation must consider non-financial stakeholders (such as employees and customers) in their decision-making. The benefit corporation also differs from a non-profit, first in the respect that it is a for-profit company. In addition, a non-profit has certain tax advantages due to its legal status, while a benefit corporation is treated like a traditional corporation for tax purposes. The benefit corporation does share with a non-profit the general purpose of creating a public good or offering a service to others, and some entrepreneurs and investors might view the benefit corporation as a good way to blend their interests in creating general public benefit in a way that also maximizes profits.
If you would like additional information regarding the benefit corporation, you are encouraged to consult an attorney. Click here for the Corporate and Business attorneys at Barrett McNagny.
[i] Ind. Code §§ 23-1.3-4-1 and 23-1.3-2-7.
[ii] Ind. Code §§ 23-1.3-4-2 and 23-1.3-2-10.
[iii] Ind. Code § 23-1.3-2-10.
[iv] Ind. Code § 23-1.3-4-4.
[v] Ind. Code § 23-1.3-3-1.
[vi] Ind. Code §§ 23-1.3-3-1 and -2.
[vii] Ind. Code § 23-1.3-3-4.
[viii] Ind. Code § 23-1.3-5-1.
[ix] See id. and Ind. Code § 23-1.3-7-1.
[xi] Ind. Code § 23-1.3-6-1.
[xii] Ind. Code § 23-1.3-6-2 and -3.
[xv] Ind. Code § 23-1.3-9-1.
[xvi] Ind. Code § 23-1.3-9-3.
[xvii] Ind. Code § 23-1.3-9-2.
[xviii] Ind. Code § 23-1.3-10-1.
[xxi] Ind. Code § 23-1.3-10-1.
[xxii] Ind. Code §§ 23-1.3-10-5 and -6.