More businesses these days are run by people who want to make money and a difference! The public benefit corporation is a great way to do both.
What is a public benefit corporation?
These corporations are fundamentally the same in structure as a traditional corporation, with a big exception: they specifically commit company revenue, assets or both to a cause that benefits the world, in addition to maximizing shareholder profits.
While regular companies may donate time and resources to charities or causes as well, they are allowed to do so at their discretion. In contrast, a Public Benefit Corporation is required to fulfill their altruistic intent, as written in their certificate of incorporation and bylaws.
Public benefit corporations have an advantage over traditional corporations in that they are more attractive to charitably inclined investors who benefit financially from the sale of a product or service, but who are also willing to consider a defined corporate giving culture to share the profits created. Consumers and employees are drawn to these organizations as well for the chance to be part of something meaningful.
What does a public benefit corporation look like in real life?
Notable public benefit corporations you may have heard about include Patagonia and Kickstarter.
How can you become a public benefit corporation?
Public benefit corporations are not available as an entity type in all U.S. states. As of now, there are 36 states recognizing the public benefit corporation, with others still taking it into consideration.
To become a public benefit corporation, a company must find a state that recognizes the entity structure and follow state laws, including tax. Choosing a state of incorporation is important because each state sets their own rules, some more stringent than others.
Generally, a state requires the filing of a Certificate of Incorporation that also clearly marks the entity is a public benefit corporation and lists the company’s philanthropic intent. The stock certificates may need to show the company is a public benefit corporation as well. Some states have restrictions as to which types of organizations may elect such a status; for example banks and professional corporations are not allowed this choice in certain states.
However, it may be possible to structure the company in a manner that could get around these limitations. This could include utilizing a holding company to elect public benefit corporation status where the underlying company may not be able.
Existing traditional corporations can become public benefit corporations in states that recognize the entity by amending their governing documents. If currently incorporated in a state that does not offer the public benefit corporation, a company may consider reincorporating to a complying state; however, this has the potential to be complicated, so it’s important to obtain legal and tax advice prior to making any such move.
Tax and Accounting Considerations in Public Benefit Corporations
Traditional corporations and public benefit corporations have the same accounting and federal tax requirements but differ in their legal obligations (and protection) to satisfy stated public benefits. Management of a public benefit corporation is expected to take into consideration all stakeholders of the company, which includes their philanthropic mission, not solely shareholder profit. A company may choose a specific public benefit, or retain a general public benefit purpose, depending on state law.
To ensure a public benefit corporation is accountable in upholding its unique commitment, most state law requires the company provide an annual benefit report that may or may not be public record, but generally does not require audit or certification by a third party. This report allows shareholders to evaluate if company leadership is managing their responsibilities appropriately or whether action should be taken to redirect in better alignment with company mission. The annual benefit report also discourages the incentive for a company to claim public benefit corporation status for publicity only, as the public would be able to determine this for themselves via the report.
What a Public Benefit Corporation is Not
A public benefit corporation is not the same as a nonprofit corporation. Though both do have some of the same goals, they are vastly different in many ways. Nonprofit corporations are exempt from Federal income tax under IRC Sec. 501(c)(3) and donors may take a tax deduction for their contributions to such entities. However, public benefit corporations raise money by privately or publicly selling stock or issuing debt and operate largely in the same manner as a for-profit enterprise.
Forming a nonprofit corporation starts similarly to a for-profit corporation in that it requires incorporation in a state. However, the next step is unique to nonprofit organizations: filing a Form 1023 with the Internal Revenue Service to be approved as exempt from Federal income tax under IRC Sec. 501(c)(3). And while a nonprofit corporation is generally not allowed to have profit motive, a public benefit corporation may have a distinct profit motive separate from its charitable intent. For example, the company may be a for-profit manufacturer, yet still have its required public benefit mission of supporting animal shelters across the nation. Upon dissolution of a nonprofit company, it must distribute its assets among other nonprofits, while a public benefit corporation sells its assets, pays its liabilities and then the shareholders receive those proceeds net of liabilities.
Preparing for an exit takes time and planning, regardless of your entity type.LEARN MORE ABOUT WHY IT’S IMPORTANT TO PLAN AHEAD
A B Corporation is not the same as a public benefit corporation, though many times a public benefit corporation is a B Corporation. A B Corporation is a certification a company can attain and is administered by B Lab, a non-profit organization assessing a company’s positive social and environmental endeavors. Becoming a B Corporation has both legal and social responsibility requirements but is a worthy goal and brings about good publicity for the company as well. Other third-party certifications are also available.
When a corporation goes public and they are incorporated in Delaware (as many are), the state requires the company to become a public benefit corporation to maintain B Corporation status. This can prove problematic for some in the beginning, as they have pressure to provide a return on investment to shareholders, and converting from a regular corporation to a public benefit corporation can be complicated. Etsy ran into this trouble a few years back, and ultimately decided to relinquish its B Corporation status to enable a smooth transition from privately held to public company. Etsy still maintains they will be a sustainable, socially responsible business, but couldn’t meet both the B Corporation requirements and company profit expectations at that time.
How do you tell what type of entity you have or want?
The table that follows shows some similarities and differences between a nonprofit corporation, public benefit corporation, and traditional corporation:
|Nonprofit Corporation||Public Benefit Corporation||Traditional Corporation|
|Owners or Shareholders||No||Yes||Yes|
|Board of Directors||Yes||Yes||Yes|
|Return Dividends to Shareholders||N/A||Yes||Yes|
|Sale Proceeds to Shareholders Upon Dissolution||No||Yes||Yes|
|Donors Receive a Tax Deduction||Yes||No||No|
|Issues Stock or Debt to Raise Money||No||Yes||Yes|
|Exempt from Federal Income Tax||Yes||No||No|
|Tax Form||990 Series||1120||1120|
|Prepare Annual Benefit Report||No||Yes||No|
Interested in Becoming a Public Benefit Corporation?
Businesses should obtain legal, tax and accounting guidance before making decisions regarding entity structure. It’s important to weigh the pros and cons of each type as well as the benefit you’re hoping to achieve.
Interested in becoming a public benefit corporation?