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Creating a Benefit Corporation

Many business owners and other individuals desire to operate a business that provides a societal benefit similar to those provided by tax-exempt charitable organizations but are deterred by the “non-profit” aspect of it.  A recently passed Maryland statute authorizes the creation of a Benefit Corporation, a new form of corporate entity in Maryland.  A Benefit Corporation is a for-profit corporation that also focuses on providing benefits to society.  Both new and existing corporations can elect to be a Benefit Corporation. A Benefit Corporation must have the purpose of creating a general public benefit in addition to any other lawful purposes.  The statute defines a public benefit as “a material, positive impact on society and the environment, as measured by a third party standard, through activities that promote a combination of specific public benefits.”  Specific public benefits include:

  • providing individuals or communities with beneficial products or services;
  • creating economic opportunity for individuals in communities beyond the creation of jobs in the normal course of  business;
  • preserving the environment;
  • improving human health;
  • promoting the arts, sciences or advancement of knowledge;
  • increasing the flow of capital to entities with a public benefit purpose; and
  • the accomplishment of any other particular benefit for society or the environment.

A Benefit Corporation is expected to make a profit, like a traditional corporation.  However, unlike a traditional for-profit corporation, a Benefit Corporation’s primary focus need not be maximizing profits.  As a result, directors are protected against shareholder suits based on decisions that are not strictly geared toward maximizing profits, so long as the directors reasonably perform certain duties.  In addition to carrying out standard fiduciary duties required of all corporate directors, directors of a Benefit Corporation must also consider the effects any action or decision not to act may have on:

  • the corporation’s stockholders;
  • the employees/workforce of the corporation and its subsidiaries and suppliers;
  • the interests of customers as beneficiaries of the general or specific benefit purposes the corporation intends to create;
  • community and societal considerations, including those of any community in which the offices or facilities of the corporation or its subsidiaries or suppliers are located; and
  • the local and global environment.

The directors may also consider any other pertinent factors or the interests of any other group.  If a director reasonably complies with these duties, he or she is protected against liability for his or her decisions or actions as a director of the corporation.

To ensure that a Benefit Corporation is fulfilling its purpose of creating a general public benefit, it must have an independent third party develop a standard for defining, reporting and assessing best practices for corporate, social and environmental performances.  The legislation calls for transparency, requiring the Benefit Corporation to make certain information concerning the third party standard publicly available, including, the factors that are considered when measuring the company’s performance, the identity of the creator of the standard and the process for making any changes to the standard.

In addition to making information accessible to the public concerning the third party standard, a Benefit Corporation is also required to provide to all stockholders an annual benefit report within 120 days of the end of the corporation’s fiscal year.  This report must include a description of:

  • the ways in which the corporation pursued a general public benefit during the year and the extent to which it created such general public benefit;
  • the ways in which the corporation pursued any specific public benefit the creation of which is identified as one of its purposes in its charter and the extent to which it created such benefit; and
  • any circumstances that hindered the corporation’s creation of a public benefit.

The benefit report must also include an assessment of the societal and environmental performance of the corporation prepared in accordance with the third party standard, which the corporation must apply consistently with the way it applied the standard to the prior year’s benefit report or the report must include an explanation of the reason for any inconsistent application.

For more information on this topic, please contact William G. Sturm at 410-583-2400 or Sturm@bowie-jensen.com

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