Benefit corporation

Based on Wikipedia: Benefit corporation

The Legal Loophole That Let Companies Care About More Than Money

Here's a peculiar fact about American corporate law: for most of the twentieth century, if you ran a company and made a decision that helped the environment at the expense of short-term profits, your shareholders could sue you. And they'd probably win.

This wasn't some arcane legal theory. It was the operating assumption of American capitalism. The idea came from a 1919 court case involving Henry Ford, of all people, who wanted to use company profits to lower car prices and pay workers more. The Dodge brothers, minority shareholders in Ford Motor Company, disagreed. They wanted dividends. The court sided with the Dodges, establishing what would become known as "shareholder primacy" — the principle that a corporation exists primarily to make money for its owners.

For nearly a century, this created an awkward situation. Plenty of business owners wanted to do more than just maximize returns. They wanted to treat employees well, protect the environment, strengthen their communities. But the legal structure of the corporation actively discouraged this. Every decision had to be justified in terms of long-term shareholder value. If you couldn't draw a clear line between helping the planet and helping the stock price, you were on shaky ground.

Then, in 2010, Maryland did something that quietly revolutionized American business law. It created a new kind of company: the benefit corporation.

What Makes a Benefit Corporation Different

The concept is deceptively simple. A benefit corporation is a for-profit company — it pays taxes like any other business, and its owners can absolutely get rich. The difference is that the law explicitly permits, and in some cases requires, the company's directors to consider more than just shareholder returns.

When running a benefit corporation, directors must weigh the impact of their decisions on employees, customers, the local community, and the environment — not just investors. This isn't corporate social responsibility as a marketing strategy. It's baked into the legal structure of the company itself.

The protection works in both directions. Directors are shielded from lawsuits claiming they failed to maximize profits when they were pursuing social or environmental goals. At the same time, if the company abandons its stated mission, shareholders have legal recourse.

This matters most during vulnerable moments — when a company is sold, for instance. In a traditional corporation, courts have ruled that directors must accept the highest purchase offer to maximize shareholder value. This is why so many mission-driven companies lose their way after acquisition. The new owners have a legal obligation to prioritize profit over purpose.

Benefit corporations escape this trap. Their directors can legally turn down a higher offer from a buyer who might abandon the company's environmental or social mission in favor of a lower offer from someone committed to the original vision.

The Rise of a Movement

After Maryland's groundbreaking legislation, the idea spread quickly. Within eight years, thirty-six states and Washington, D.C. had passed similar laws. The movement had touched a nerve.

What drove companies to file as benefit corporations? A 2013 study by MBA students at the University of Maryland found something interesting: many businesses in the state had chosen the designation primarily for community recognition. They wanted their customers, employees, and neighbors to know that their values were more than just marketing copy. The legal structure served as a credible commitment device — a way of putting their money where their mission was.

The range of companies adopting the form is remarkably broad. The nature of what a company actually does — whether it sells outdoor gear or processes payroll — doesn't determine whether it can be a benefit corporation. What matters is the commitment to consider stakeholders beyond shareholders.

Patagonia, the outdoor clothing company famous for its environmental activism, became one of the most prominent benefit corporations. Its founder, Yvon Chouinard, explained the appeal: the legal structure would allow Patagonia to stay mission-driven through changes in leadership, fundraising rounds, and even changes in ownership. The values he'd built into the company would be legally protected, not just culturally preserved.

The Transparency Trade-Off

Benefit corporations come with strings attached. Most states require them to publish annual benefit reports, documenting their social and environmental performance. These reports must use third-party standards — you can't just grade your own homework.

In theory, this creates accountability. Anyone can see whether a benefit corporation is actually living up to its stated mission or just trading on the designation for good publicity.

In practice, enforcement is spotty. Few states have established consequences for companies that fail to publish required reports or that publish reports falling short of legal requirements. The transparency provisions have teeth, but those teeth don't always bite.

This gap between aspiration and enforcement points to a broader challenge. Approximately thirty-six jurisdictions now authorize benefit corporations, but outside those jurisdictions, there are no legal standards defining what the term means. A company calling itself a "benefit corporation" in a state without enabling legislation isn't bound by any particular requirements.

Benefit Corporations Are Not B Corps

Here's where the terminology gets confusing. A benefit corporation is a legal structure — a specific type of company recognized under state law. A Certified B Corporation, often called a "B Corp," is something else entirely: a certification issued by a nonprofit organization called B Lab.

To become a B Corp, a company must score at least 80 out of 200 on B Lab's impact assessment, pass an audit, and pay an annual certification fee. The certification is voluntary and must be renewed periodically. As part of the recertification process, companies pledge to incorporate as a benefit corporation if that option is available in their state.

Many B Corps are also benefit corporations. Some benefit corporations have never sought B Corp certification. The relationship is complementary but not identical — like the difference between being licensed to practice medicine in a particular state and being board-certified in a specialty.

Related Experiments in Corporate Purpose

The benefit corporation isn't the only attempt to escape the constraints of shareholder primacy. American business law has spawned several related experiments.

Some states have created social purpose corporations, which are more flexible than benefit corporations in their legal requirements and responsibilities. These allow companies to specify particular social purposes without the broader stakeholder considerations required of benefit corporations.

Low-profit limited liability companies, known by the ungainly abbreviation L3Cs (pronounced "ell-three-sees"), occupy a different niche entirely. They were designed to help philanthropic foundations make what the Internal Revenue Service calls "program-related investments" — investments that advance charitable purposes while still generating some financial return. L3Cs blend limited liability company law with nonprofit law, though they remain for-profit entities for tax purposes.

Connecticut added an interesting wrinkle to the benefit corporation form: "preservation clauses." These allow a company's founders to permanently prevent the corporation from reverting to a traditional for-profit structure, even if future shareholders want to make the change. It's a way of locking in the mission not just for the next owner but forever.

The Global Spread

The benefit corporation concept has traveled well beyond American borders.

Italy was among the first to follow, passing legislation in December 2015 creating the "Società Benefit" — directly modeled on American benefit corporations. Colombia introduced similar legislation in 2018. British Columbia became the first Canadian province to offer benefit company incorporation in June 2020, after the leader of the provincial Green Party championed the idea.

The United Kingdom had actually gotten there first, in a sense. Community Interest Companies, or CICs, have been available since 2005, designed for businesses trading with a social purpose or carrying on activities for community benefit. They're not identical to benefit corporations — the British legal system has different traditions around corporate purpose — but they address similar concerns.

Israel offers an interesting counterpoint. Israeli law defines a "public benefit company," but with stricter constraints than American-style benefit corporations. Israeli public benefit companies may only pursue goals from a closed list codified in law, and they're prohibited from distributing dividends entirely. This is closer to nonprofit status than the hybrid approach of American benefit corporations.

The Mechanics of Transition

Any existing corporation can become a benefit corporation. The process isn't terribly complicated, but it requires several deliberate steps.

First, the company must choose specific public benefit purposes to pursue. These get written into the articles of incorporation — the foundational document that establishes the company's existence and basic structure. The term "public benefit corporation" or the abbreviation "PBC" can be added to the company's name, though this is optional.

The critical step is shareholder approval. Amending the articles of incorporation requires a vote, typically needing a two-thirds supermajority. All shareholders must be included, even those whose shares don't normally carry voting rights.

There's a catch, though. Shareholders who vote against the transition and meet certain qualifications can invoke "dissenter's rights" — the legal entitlement to have the company buy back their shares at fair value before the change takes effect. This protects minority shareholders from being forced into a company with a fundamentally different purpose than what they originally invested in. But it also means companies considering the transition need enough cash on hand to buy out dissenting shareholders.

Once approved, share certificates must note the company's benefit corporation status, and the company becomes subject to annual reporting requirements.

For entities that aren't already corporations — limited liability companies, partnerships, or sole proprietorships — the transition is more complex. They'll need to change their fundamental tax status as part of becoming a benefit corporation, which involves its own complications.

The Question of Employee Ownership

Some researchers have noticed an interesting pattern: benefit corporations seem to pair well with employee ownership structures.

This makes intuitive sense. Both forms push against the traditional model where owners extract maximum value while workers are treated as expenses to be minimized. A company committed to considering employee welfare as part of its core mission would logically benefit from having employees as owners, aligning interests that the traditional corporate form sets in opposition.

Benefit corporations are also distinct from cooperatives, though the forms can be combined. Cooperatives are a governance structure where shares and voting power are held equally by members — all employees, or all customers, for instance. A benefit corporation could organize as a cooperative, and a cooperative could incorporate as a benefit corporation, but neither requires the other.

The Tax Reality

Here's something that surprises many people: benefit corporations receive no special tax treatment. They're taxed exactly like any other corporation — as either C corporations or S corporations, depending on how they've elected to be treated.

The one exception involves charitable contributions. When a benefit corporation donates to a qualifying nonprofit, those contributions receive tax-deductible status, just as they would for any corporation. But a traditional corporation making the same donation would receive the same treatment. The benefit corporation form doesn't confer any additional tax advantages.

This is worth emphasizing because it undercuts one common criticism of benefit corporations — that they're primarily a tax dodge. They're not. Whatever motivates companies to adopt the form, it isn't preferential tax treatment, because there isn't any.

Practical Advantages

If benefit corporations don't offer tax breaks, why do companies bother?

The legal protection for pursuing non-financial goals is real and valuable. Directors of traditional corporations live with a background anxiety: even if their shareholders seem supportive of mission-driven decisions, any shareholder could sue claiming the directors failed their fiduciary duty to maximize returns. The 2010 Delaware case eBay Domestic Holdings v. Newmark reinforced this fear, with the court explicitly stating that a non-financial mission "inconsistent" with maximizing shareholder value violates directors' duties.

Benefit corporations eliminate this ambiguity. The statute itself authorizes directors to consider stakeholder interests. There's no need to construct elaborate justifications for why helping the environment will eventually boost shareholder returns. Directors can simply note that considering environmental impact is part of their statutory duty.

Companies that transition to benefit corporation status also report advantages in hiring and retention. People increasingly want to work for organizations whose values align with their own. The benefit corporation designation signals that commitment in a way that's legally binding, not just aspirational. It's harder to dismiss as marketing when it's written into the corporate charter.

Oregon recently took this a step further. A 2023 law allows public contracting agencies to award government contracts to benefit corporations even when their prices are up to five percent higher than competing bids. The state has decided that the public benefits these companies provide are worth a modest premium.

The Limits of Legal Structure

It would be naive to suggest that benefit corporation status transforms corporate behavior automatically. Legal structure creates possibilities and removes obstacles, but it doesn't guarantee outcomes.

A benefit corporation's directors must consider stakeholder interests, but "consider" is a squishy verb. They can consider the impact on the community and still decide that layoffs are necessary. They can weigh environmental concerns and still choose the cheaper, dirtier option. The requirement is procedural — that directors think about these impacts — not substantive — that they always prioritize them.

Enforcement remains weak. Annual benefit reports are required, but as noted earlier, penalties for non-compliance are rare. The right to sue over failure to pursue public benefit belongs only to shareholders and directors, not to affected communities or the public at large. This limits accountability to those already inside the corporate tent.

And despite the movement's growth, benefit corporations remain a tiny fraction of the American business landscape. Most companies have never heard of the form. Most that have heard of it haven't adopted it. The legal innovation may be significant, but its practical impact is still constrained by limited uptake.

What It All Means

The benefit corporation represents something philosophically interesting: a legal acknowledgment that the profit-maximization theory of corporate purpose, however dominant, isn't the only option.

For a century, American law told entrepreneurs that if they wanted to build a mission-driven business, they had to do so despite the legal structure of the corporation, not because of it. The benefit corporation flips this. Mission becomes legally protected. Stakeholder consideration becomes a duty, not a liability. The law stops working against purpose and starts working for it.

This doesn't solve the fundamental tensions between profit and purpose, between what's good for shareholders and what's good for the world. Those tensions are real, and no legal structure can legislate them away. What benefit corporation law does is create space for companies to navigate those tensions honestly, without pretending that every environmental initiative is secretly a profit strategy or that every worker-friendly policy is really just retention optimization.

When OpenAI restructured recently, moving toward a more traditional corporate form, it highlighted something the benefit corporation movement has understood for years: how a company is organized legally shapes what it can become. The mission you write into your charter matters. The legal protections you build around that mission matter. The accountability structures you accept matter.

Benefit corporations won't transform capitalism. But they've created something that didn't exist before: a legal form where doing good isn't a liability to be defended, but a purpose to be pursued. In the long history of corporate law, that's worth something.