Benefit corporations now allowed in seven states

Outdoor clothing supplier Patagonia was one of the first California corporations to register as a benefit corporation. Image: Flickr / jetalone / CC-BY-SA

Legally, any corporation has a duty to its shareholders to try to maximize profit, which means managers can be prosecuted for making any decision that is not financially based. In seven states, however, companies can now register as “benefit corporations,” which are allowed to focus on something other than profit.

What it means to be stockholder-owned

For many companies, being publicly traded means there is a legal duty to try to maximize profit. This could mean anything from reducing costs by using cheaper suppliers to selling a product for a higher price. Some companies that try to make decisions on a mission-based or ethical basis, such as choosing organic cotton, are often stymied by this fiduciary duty.

Businesses cannot always be nonprofit

Businesses that do wish to fulfill an ethical goal or mission-based ideal do have the option of registering as a nonprofit. A nonprofit, however, is a federal designation that requires a business to operate entirely without profit. This means that any profit from the business must be put back into the non-profit mission, which businesses may not be open to.

A new solution

Hybrid businesses, otherwise known as benefit corporations, are now legally allowed in seven different states. These corporations are also known as “mission-driven for-profit,” businesses that are allowed to make a profit but are also allowed to make decisions not financially driven.

[One pay day loan company has registered as a California benefit corporation.]

In essence, registering as a benefit corporation puts stockholders and investors in a company on notice that financial factors will not be the only consideration in business decisions. The social goals of these businesses must be outlined in the bylaws of the company. There are currently seven states that allow benefit corporations: California, Maryland, Virginia, New Jersey, New York, Vermont and Hawaii.

Sources

Wall Street Journal
Napa Valley Register
Transworld

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