Tuesday, October 23, 2012

Guest Blogger: Benefit Corporations in Virginia: What's the Fuss (or Is There Any)?

By Carter Scott

On July 1, 2011 Virginia became one of only four states (there are now seven) to authorize the creation of a “Benefit Corporation”, so named because it authorizes the officers and directors to create a public benefit to society as a whole, in addition to generating profit for its stockholders.

The new law applies only to Virginia corporations, so other forms of business, such as limited liability companies and partnerships, must first convert to corporate form in order to make the election. A similar law applicable to limited liability companies was introduced, but not adopted, in the 2012 legislative session.

The most likely methods of doing so are (i) by a newly formed corporation in its original Articles of Incorporation; or (ii) by an existing corporation filing Articles of Amendment. Both methods require the unanimous approval of stockholders. 

Traditionally, the sole objective of a for-profit corporation has been to maximize stockholder return, and indeed the company’s directors and officers are subject to legal action for failing to do so.  As a Benefit Corporation, the company’s management has added protection from stockholder lawsuits. 

On the other hand, suit may be brought by or in the name of the Benefit Corporation to enforce compliance with the public benefit designated in the Articles, but directors are protected against personal liability and officers are given broad discretion in satisfying the goal. 

The company must prepare an annual report to its stockholders and publish the report on its website, if any, to describe its compliance with the public benefit selected, all of which must be measured by an independent third party standard. 

As long as certain business support, whether financial or intellectual, is dedicated annually to the designated public benefit, the decision is up to the company. The support may be for charity, the environment, religious or educational institutions, or a myriad of other causes, many of which are set out in the statutes. 

While it is obviously too early to tell how this new “social enterprise” model will be received by Virginia business organizations (there are currently less than 20 on file at the State Corporation Commission), published reports by Maryland companies that have adopted that state’s version of the law since its adoption in 2010, suggest that it has created a competitive advantage with potential customers and employees who desire to do business with socially responsible business entities.

Finally, there are around 475 business entities around the country that have been certified as socially conscious by a Pennsylvania non-profit organization, known as B Lab (not connected to the legal form of “Benefit Corporation”), which further supports a trend of public acceptance, and indeed demand, for more public spirited commercial enterprises. Recent articles in the business press generally use the terms interchangeably.

1 comment:

  1. This is an interesting concept. A couple of questions come to mind.

    First, what activities are available that allows a "benefit corporation" to do tax deductible stuff given the relatively low federal limit on deductible charitable contributions and the requirement that expenses not incurred to generate taxable income are not deductible?

    Second, how is compliance with that "independent third party standard" verified? How many CPA firms have the required skill set on staff to issue an opinion on that? For that matter, what standards exist that would apply to such engagements?


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