Benefit Corporations,
L3Cs and All the Rest: Making Sense of Those Confusing Choices
Anne Field,
Contributor 5/25/2012
With Illinois and
Louisiana poised to become the next states to adopt Benefit
Corporation legislation, it’s time to take a step back and look at the
confusing array of legal forms out there available to socially-minded
companies.
And the landscape
certainly is confusing.
Start with Benefit
Corporations. It’s a new class
of corporation, pioneered by the Berwyn, Pa-based nonprofit B Lab (more about
them soon), officially the law in seven states. It mandates that companies
and their boards take into account public benefits that impact society
and the environment when making decisions.
These companies also
have to issue an annual report about just how they’re doing in addressing their
social and environmental goals, audited by a third party.
The goal is to give
companies legal protection to take certain steps that benefit their
non-financial objectives, even if it’s not so good for the bottom line. And for
shareholders, it ensures that companies won’t drift from their non money-making
mission.
Flexible Purpose
Corporations. This one is only the law in California, which
also allows for Benefit Corporations. They were passed in October.
Flexible Purpose
Corporations, unlike the Benefit variety, don’t have to meet general public
benefits. Instead, they can specify at least one “special purpose”–addressing
environmental sustainability, for example, or building a park. So the social
focus is a lot more narrowly defined than it is with Benefit Corporations.
Ultimately, the
Flexible Purpose is designed for larger, more traditional companies that want
to consider matters other than the financial bottom line, but aren’t “mission
driven at their core,” according to Heather Van Dusen, a senior associate at B
Lab.
Maryland Benefit LLC. In addition to allowing for Benefit
Corporations, Maryland also permits companies to do the same thing but as a
Limited Liability Company. That way, businesses already registered as LLCs
don’t have to convert over to a corporate structure.
L3Cs. They’re low-profit limited liability companies with a
charitable or educational purpose. (I recently wrote about them). There are about 600 such
companies in nine states.
Proponents created
L3Cs to be entities that can be treated as Program Related
Investments (PRIs) by foundations. By law, foundations have to direct 5% of
their assets to charitable purposes every year. They can do that through
PRIs, as long as the organization they’re investing in has a charitable
or educational purpose and doesn’t include making a profit as a significant
goal. Plus, for-profit investors can put money into an L3C and, as a result,
companies potentially can attract considerably more funding.
Foundations have been
slow to adopt PRIs. But, with new rulings from the IRS, that could change soon.
B Corporations. This
isn’t a corporate structure, even though that word is in the name. It’s a
certification from B Lab, which rates triple-bottom-line companies. (Think
of Fair Trade USA,
which certifies Fair Trade companies). Started in 2007, there are now 530 such
businesses. Ratings cover five areas–society, environment,
employees and so on–with 130 to 180 factors depending on company size and
industry. Businesses have to score over 80 out of a total of 200 points. There
also are unannounced audits of about 10% of all certified companies every year.
There you go.
Of course, there’s a
long ways to go before, say, the Benefit Corporation is adopted by many, if not
most, states. But it’s kind of amazing that in a relatively short time,
so many choices have become available
