PURPOSE AND PROFITS — PUBLIC BENEFIT CORPORATIONS: A NEW EMERGING BUSINESS STRUCTURE

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Small businesses often get caught flat-footed coming out of the summer. Normally a time for long vacations (and daydreaming about those long vacations), summers are hardly ever peak times for most businesses. Instead of dwelling on external factors (your non-controllables), scaling companies would do well to reevaluate management and other organizational structures as the busy fall season approaches.

Managers of high-growth businesses too often implement a reactive management structure instead of anticipating future needs. Each business has unique needs and considerations related to its management structure. Essentially, though, your enterprise needs to answer three key questions: why, what, and who.

PUBLIC BENEFIT CORPORATIONS VS. NONPROFITS

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Public benefit corporations have been around since 2010. Dozens of states now have laws permitting this type of corporate structure. Well-known examples of PBCs include Patagonia, Warby Parker, Allbirds, and Vital Farms Inc. A growing number of PBCs are publicly traded, reflecting the popularity of “conscious capitalism”; environmental, social, and governance (ESG) issues; and sustainability.

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Nonprofit corporations have been around since the end of the nineteenth century and are associated with the Progressive Era, marked by political reform and social activism.[1] As the name suggests, nonprofits are not permitted to distribute profits to their members. They also enjoy tax-exempt status that allows them to keep more of the money they bring in for their chosen cause, such as philanthropy or cancer research. There are different types of nonprofit organizations, but at their core, profitmaking is excluded from a nonprofit’s mission and purpose.

Public benefit corporations include profitmaking in their corporate charter. They may even prioritize financial growth. However, profits are only one part of a PBC’s corporate mission. Alongside maximizing shareholder value are social and environmental considerations explicitly spelled out in the corporate governing documents. For example, when Patagonia became a registered public benefit corporation in 2012, it adopted six benefit purpose commitments[2]:

  • 1 percent for the planet

  • Build the best product with no unnecessary harm

  • Conduct operations causing no unnecessary harm

  • Share best practices with other companies

  • Transparency

To ensure that companies do not just talk about doing good with no measurable results, PBCs must report to their shareholders every other year on what they have done to further the public benefits stated in their corporate charter. And just as shareholders can file a lawsuit challenging whether the board upheld its fiduciary duty to investors, shareholders in PBCs have standing to sue the board to enforce the corporation’s public benefit purpose. Of course, this creates new legal risks not associated with traditional corporations.

Thirty-six states and the District of Columbia permit corporations to be organized as public benefit corporations. Most PBCs are based in Delaware, according to Kiplinger.[3] Under the laws of that state, PBC corporate directors accused of not delivering on public benefit goals have had stronger protections since 2020 and can opt-out of (or in) the PBC structure if a majority of shareholders vote for this.

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Generally, in Delaware and other states, an existing corporation can convert to a PBC by amending its charter and bylaws, pending board and majority stockholder approval. However, the number of votes needed for conversion may vary from state to state. New companies can also incorporate as a PBC at the founding stage.

DIFFERENCES BETWEEN PUBLIC BENEFIT CORPORATIONS AND B CORPS

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B corporations (also known as B corps) are certified by the nonprofit B Lab.[4] That is, the B corp is a certification—not a distinct type of corporate entity, and it need not be a corporation at all.

While there is significant overlap between B corps and PBCs, a PBC is not necessarily a B corp. To become a certified B corp, a company must meet specific legal requirements related to stakeholder governance. These requirements differ depending on the company’s legal entity type (corporation, limited liability company, cooperative, etc.) and legal jurisdiction. Often, B corps are required to reincorporate as a benefit corporation and make other structural changes.

Some say that B corp status is simply a branding and marketing strategy useful at a time when customers are showing a preference for sustainable brands. But unlike PBCs, which require no third-party certification, B corps can be a way to show that a company is dedicated—and accountable—to multiple stakeholders.

PROS AND CONS OF PUBLIC BENEFIT CORPORATIONS

Public Benefit Corporation

Concepts such as sustainability and environmental responsibility are important to several types of consumers, but their importance is not equal across groups. For example, a survey from Oracle found that 70 percent of respondents said they would switch brands for a company that was committed to ESG-related initiatives; however, ESG issues were more important to Millennials and Gen Z compared to Baby Boomers.[5] Notably, the study also found that paying lip service to these issues was not enough; customers want to see real progress.

For companies that are genuinely interested in being a positive social force, the PBC structure can help to embed specific goals into a company’s DNA. Patagonia founder Yvon Chouinard says that the legal framework of a PBC allows his company to retain the mission of its founders through successions in leadership, financing rounds, and ownership changes.[6] 


Although a company may incorporate as a public benefit corporation, it is not held to rigorous standards. Unless it takes the further step of B corp certification, there are no third-party performance and reporting metrics, and there is not much that would stop it from going through the greenwashing motions. Companies that want to go the extra mile and become B corps are also subject to enhanced paperwork and legal fees, but regular PBCs must also submit a report every other year in addition to their other reporting duties and may have to pay additional legal fees to convert to the PBC structure. There are also questions about the attractiveness of PBCs as takeover targets because there may be fewer benefits to shareholders versus standard corporations.

Perhaps the biggest downside to public benefit corporations is that they have only been around for roughly a decade. Because they are unproven, questions remain about the business and legal risks of PBC status. Optimists point to the fact that about a dozen public companies have incorporated as PBCs since 2020 and several private PBCs have gone public.

Interested in Incorporating as a Public Benefit Corporation?

Investor and consumer interest in ESG issues could be enough to make up for the current risks of incorporating as a PBC, but before making the decision to formally commit to pursuing social good, you should speak with experienced business lawyers about the potential impacts. To schedule a meeting with our attorneys, please contact us.

Footnotes:

[1] Hana Muslic, A Brief History of Nonprofit Organizations (And What We Can Learn), Nonprofit Hub (Oct. 27, 2017), https://nonprofithub.org/a-brief-history-of-nonprofit-organizations/. 

[2] ¿Ann. Benefit Corp. Rep., Patagonia, Fiscal Year 2019, https://www.patagonia.com/on/demandware.static/-/Library-Sites-PatagoniaShared/default/dwf14ad70c/PDF-US/PAT_2019_BCorp_Report.pdf. 

[3] Ellen Kennedy, What Are Public Benefit Corporations (PBCs)?, Kiplinger (Oct. 15, 2021),  https://www.kiplinger.com/investing/esg/603598/what-are-public-benefit-corporations-pbcs. 

[4] Make Business a Force for Good, B Lab, https://www.bcorporation.net/. 

[5] Jon Chorley, Time for Business To Step Up On Sustainability, Forbes (May 5, 2022), https://www.forbes.com/sites/jonchorley/2022/05/05/time-for-business-to-step-up-on-sustainability/?sh=1f2379613cf9. 

[6] https://www.patagonia.com/b-lab.html 

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