The Rise of Benefit Corporations: A Comprehensive Guide

Published: November 18, 2023 • Incorporation

Contents

Introduction: The Evolution of Corporate Purpose

For more than a century, the American corporate landscape has been dominated by a singular focus: maximize shareholder value. This principle, often traced back to the Michigan Supreme Court’s 1919 decision in Dodge v. Ford Motor Co., has guided corporate law and governance. However, in recent years, a new model has emerged that challenges this paradigm—the benefit corporation.

As entrepreneurs increasingly seek to balance profit with purpose, and as consumers and investors demand greater social and environmental responsibility from businesses, benefit corporations provide a legal framework that allows companies to pursue both financial returns and public benefits. This comprehensive examination explores benefit corporations and similar purpose-driven entities, with particular focus on California and Delaware law, while also surveying developments across other states and international jurisdictions.

The Problem with Shareholder Primacy

Traditional corporate structures face an inherent tension when pursuing social goals. Directors and officers of conventional corporations may face legal risk when making decisions that prioritize social or environmental benefits over maximizing shareholder returns. This problem was starkly illustrated in eBay Domestic Holdings, Inc. v. Newmark, 16 A.3d 1 (Del. Ch. 2010), where the Delaware Chancery Court reaffirmed that a board’s decision to implement a rights plan that intentionally limited shareholder value was inconsistent with directors’ fiduciary duties.

Chancellor Chandler’s opinion made this tension explicit: “Directors of a for-profit Delaware corporation cannot deploy a [policy] to defend a business strategy that openly eschews stockholder wealth maximization.” While the business judgment rule provides directors with significant discretion in most scenarios, this protection becomes tenuous in change-of-control situations, where courts require directors to obtain the highest value reasonably available for shareholders.

This legal framework creates a fundamental constraint for mission-driven businesses. Even if a corporation has been pursuing social or environmental initiatives for years, a change in management or ownership could shift priorities away from these objectives, with dissenting shareholders having limited recourse.

The Benefit Corporation Solution

Benefit corporations address this problem by expanding the fiduciary duty of directors to require consideration of non-financial interests alongside shareholder value. The model embeds a commitment to public benefit directly into the corporate DNA, providing legal protection for directors who balance profitability with public benefit.

As William H. Clark, Jr., the primary drafter of the Model Benefit Corporation Legislation, has noted: “The benefit corporation is the only corporate form that allows a company to write into its DNA that it has a higher purpose beyond maximizing shareholder value.”

California Benefit Corporations: Legal Framework and Requirements

California was an early adopter of benefit corporation legislation, enacting Assembly Bill 361 in October 2011, which added Sections 14600-14631 to the California Corporations Code. The law became effective on January 1, 2012, allowing California corporations to organize as or convert to benefit corporations.

Formation and Structure in California

Under California law, a benefit corporation must:

  1. State in its articles of incorporation that it is a benefit corporation (Cal. Corp. Code § 14603)
  2. Have a purpose of creating “general public benefit,” defined as “a material positive impact on society and the environment, taken as a whole, as assessed against a third-party standard” (Cal. Corp. Code § 14601(c))
  3. Optionally specify one or more “specific public benefits” (Cal. Corp. Code § 14601(e))

The California statute defines “specific public benefit” to include:

  • Providing low-income or underserved individuals or communities with beneficial products or services
  • Promoting economic opportunity beyond job creation
  • 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
  • Any other particular benefit on society or the environment

Director Duties and Liability in California

California’s benefit corporation law explicitly modifies director duties, requiring them to consider the impact of decisions on:

  • Shareholders
  • Employees
  • Customers (as beneficiaries of the general or specific public benefit)
  • Community and societal factors
  • The local and global environment
  • The short-term and long-term interests of the benefit corporation
  • The ability of the benefit corporation to accomplish its general and specific public benefit purposes

Importantly, Cal. Corp. Code § 14620(f) states that directors are not personally liable for monetary damages for failure to create general or specific public benefit. This protection is crucial for directors making difficult decisions that balance multiple stakeholders.

Transparency and Reporting

California benefit corporations must prepare an annual benefit report that:

  • Describes ways the benefit corporation pursued general and specific public benefit during the year
  • Assesses the overall social and environmental performance against a third-party standard
  • Identifies any circumstances that hindered creating public benefit
  • Includes the compensation paid to each director and the name of each person owning 5% or more of the corporation

The annual benefit report must be posted on the company’s website (if it has one) and sent to shareholders within 120 days following the end of the fiscal year (Cal. Corp. Code § 14630).

Delaware Public Benefit Corporations

Delaware, home to more than 65% of Fortune 500 companies and the most influential corporate law in the United States, adopted public benefit corporation (PBC) legislation in 2013 with the enactment of Subchapter XV of the Delaware General Corporation Law (DGCL § 361-368).

Delaware’s approach offers more flexibility than many other states, reflecting its historically business-friendly legal environment. This has made Delaware PBCs particularly attractive to venture-backed and larger companies considering the benefit corporation model.

Formation and Structure in Delaware

To form a Delaware PBC, a corporation must:

  1. Include in its certificate of incorporation a statement that it is a public benefit corporation (DGCL § 362(a)(1))
  2. Identify one or more specific public benefits to promote (DGCL § 362(a)(1))
  3. Include the identifier “public benefit corporation,” “P.B.C.,” or “PBC” in its name (DGCL § 362(c))

Unlike California, Delaware does not require adherence to a third-party standard for measuring social impact, though companies may voluntarily adopt such standards.

Director Duties in Delaware

Delaware PBCs must be managed in a manner that balances:

  1. Shareholders’ financial interests
  2. The best interests of those materially affected by the corporation’s conduct
  3. The specific public benefit(s) identified in the certificate of incorporation

The 2020 amendments to Delaware’s PBC law clarified that directors will not be considered to have acted in bad faith, or to have breached loyalty or fiduciary duty, solely because they prioritized one stakeholder over another, unless the certificate of incorporation provides otherwise. This provides significant protection and flexibility for directors of Delaware PBCs.

Reporting and Transparency

Delaware initially required biennial benefit reports but amended its law in 2020 to make reporting optional unless specified in the certificate of incorporation. If required, the report must include:

  • The objectives established by the board to promote the public benefit
  • Standards for measuring progress
  • Objective factual information based on those standards
  • An assessment of success in meeting objectives

This more relaxed approach to reporting requirements reflects Delaware’s philosophy of enabling private ordering and flexibility in corporate governance.

Key Differences Between California and Delaware Approaches

The California and Delaware models represent two distinct approaches to benefit corporation legislation:

  1. Mandatory vs. Optional Reporting: California requires annual reporting against a third-party standard, while Delaware makes reporting optional unless specifically required in the certificate of incorporation.
  2. General vs. Specific Benefit: California requires a “general public benefit” with optional specific benefits, while Delaware requires identification of specific public benefits without mandating a general benefit.
  3. Third-Party Standards: California mandates assessment against a third-party standard, while Delaware has no such requirement.
  4. Director Liability Protections: The 2020 amendments to Delaware’s law provide clearer protection for directors who prioritize one stakeholder over another, whereas California’s protections are somewhat more limited.
  5. Right of Action: California allows benefit enforcement proceedings by shareholders and directors, while Delaware restricts them to shareholders owning at least 2% of outstanding shares (or $2 million in market value for publicly traded PBCs).

These differences make Delaware potentially more attractive for larger, venture-backed companies seeking flexibility, while California’s more structured approach may appeal to companies seeking greater accountability and transparency.

The National Landscape: Benefit Corporation Legislation Across States

As of early 2025, benefit corporation legislation has been enacted in 45 states plus the District of Columbia. The movement began with Maryland in 2010 and has steadily spread across the country. Here’s a comprehensive overview of states with benefit corporation laws, including their enactment dates and key statutory references:

Alabama (Ala. Code §§ 10A-2A-17.01 to 17.07, effective January 1, 2021) Arizona (Ariz. Rev. Stat. §§ 10-2401 to 2442, effective December 31, 2014) Arkansas (Ark. Code Ann. §§ 4-36-101 to 401, effective July 18, 2013) California (Cal. Corp. Code §§ 14600-14631, effective January 1, 2012) Colorado (Colo. Rev. Stat. §§ 7-101-501 to 509, effective April 1, 2014) Connecticut (Conn. Gen. Stat. §§ 33-1350 to 1364, effective October 1, 2014) Delaware (Del. Code Ann. tit. 8, §§ 361-368, effective August 1, 2013) Florida (Fla. Stat. §§ 607.601 to 613, effective July 1, 2014) Georgia (Ga. Code Ann. §§ 14-18-1 to 19, effective January 1, 2021) Hawaii (Haw. Rev. Stat. §§ 420D-1 to 13, effective July 8, 2011) Idaho (Idaho Code §§ 30-2001 to 2013, effective July 1, 2015) Illinois (805 ILCS 40/1 to 5/1, effective January 1, 2013) Indiana (Ind. Code §§ 23-1.3-1-1 to 10-6, effective July 1, 2015) Iowa (Iowa Code §§ 490.1701 to 1703, effective June 8, 2021) Kansas (Kan. Stat. Ann. §§ 17-72a01 to 17-72a09, effective July 1, 2017) Kentucky (Ky. Rev. Stat. Ann. §§ 271B.16-210 to 271B.16-400, effective July 1, 2017) Louisiana (La. Rev. Stat. Ann. §§ 12:1801 to 1832, effective August 1, 2012) Maine (Me. Rev. Stat. tit. 13-C, §§ 1801 to 1832, effective June 17, 2019) Maryland (Md. Code Ann., Corps. & Ass’ns §§ 5-6C-01 to 5-6C-08, effective October 1, 2010) Massachusetts (Mass. Gen. Laws ch. 156E, §§ 1-16, effective December 1, 2012) Michigan (Mich. Comp. Laws §§ 450.4101-5100, effective January 10, 2017) Minnesota (Minn. Stat. §§ 304A.001 to 304A.301, effective January 1, 2015) Missouri (Mo. Rev. Stat. §§ 351.1403-351.1412, effective October 28, 2021) Montana (Mont. Code Ann. §§ 35-1-1401 to 1406, effective October 1, 2015) Nebraska (Neb. Rev. Stat. §§ 21-401 to 414, effective July 18, 2014) Nevada (Nev. Rev. Stat. §§ 78B.010 to 190, effective January 1, 2014) New Hampshire (N.H. Rev. Stat. Ann. §§ 293-C:1 to 13, effective January 1, 2015) New Jersey (N.J. Stat. Ann. §§ 14A:18-1 to 11, effective March 1, 2011) New Mexico (N.M. Stat. Ann. §§ 53-4-1 to 53-4-5, effective February 18, 2020) New York (N.Y. Bus. Corp. Law §§ 1701-1709, effective February 10, 2012) Ohio (Ohio Rev. Code §§ 1701.01 to 1701.094, effective March 24, 2021) Oklahoma (Okla. Stat. tit. 18, §§ 1201-1214, effective November 1, 2019) Oregon (Or. Rev. Stat. §§ 60.750 to 60.770, effective January 1, 2014) Pennsylvania (15 Pa. Cons. Stat. §§ 3301-3331, effective January 1, 2013) Rhode Island (R.I. Gen. Laws §§ 7-5.3-1 to 13, effective January 1, 2014) South Carolina (S.C. Code Ann. §§ 33-38-110 to 600, effective June 14, 2012) Tennessee (Tenn. Code Ann. §§ 48-28-101 to 109, effective January 1, 2016) Texas (Tex. Bus. Orgs. Code §§ 21.951-21.959, effective September 1, 2017) Utah (Utah Code Ann. §§ 16-10b-101 to 402, effective May 13, 2014) Vermont (Vt. Stat. Ann. tit. 11A, §§ 21.01 to 21.14, effective July 1, 2011) Virginia (Va. Code Ann. §§ 13.1-782 to 791, effective July 1, 2011) Washington, D.C. (D.C. Code §§ 29-1301.01 to 1304.01, effective May 1, 2013) West Virginia (W. Va. Code §§ 31F-1-101 to 31F-5-501, effective July 1, 2014) Wisconsin (Wis. Stat. §§ 204.101 to 401, effective February 26, 2018) Wyoming (Wyo. Stat. Ann. §§ 17-29-101 to 113, effective July 1, 2018)

States that have not yet enacted benefit corporation legislation include Alaska, Mississippi, North Carolina, North Dakota, and South Dakota.

Alternative Purpose-Driven Entities

Beyond benefit corporations, several other legal forms have emerged to accommodate social enterprises and purpose-driven businesses.

Social Purpose Corporations

Social Purpose Corporations (SPCs) represent an alternative approach to purpose-driven entities, with less stringent requirements than benefit corporations. Washington state pioneered this form in 2012 with the passage of RCW 23B.25, followed by California (which previously called them Flexible Purpose Corporations) and Florida.

California’s SPC law (Cal. Corp. Code §§ 2500-3503) provides more flexibility than its benefit corporation statute. Key differences include:

  1. SPCs can pursue one or more social purposes without requiring a “general public benefit”
  2. Directors have discretion in weighing social purposes against financial returns
  3. Reporting requirements are less demanding than for benefit corporations

SPCs may be attractive to companies that want some legal protection for pursuing social missions but desire greater flexibility in how they balance purpose and profit.

Public Benefit LLCs

A growing number of states have adopted legislation allowing limited liability companies to organize as public benefit LLCs, combining the flexibility of the LLC structure with the purpose-driven mission of benefit corporations.

Delaware was a pioneer in this area, amending its LLC Act in 2018 to allow for the formation of statutory public benefit LLCs. Under 6 Del. C. § 18-1202, a public benefit LLC must be managed in a way that balances the members’ financial interests, the interests of those materially affected by the LLC’s conduct, and the specific public benefit stated in its certificate of formation.

Other states with public benefit LLC legislation include:

  • Maryland (Md. Code Ann., Corps. & Ass’ns §§ 4A-1201 to 1208)
  • Oregon (Or. Rev. Stat. §§ 60.750 to 60.770)
  • Pennsylvania (15 Pa. Cons. Stat. §§ 8891-8898)
  • Utah (Utah Code Ann. §§ 48-4-101 to 402)

This structure can be particularly appealing for smaller businesses and startups that prefer the tax and governance flexibility of LLCs while still wanting to embed social purpose into their legal structure.

Low-Profit Limited Liability Companies (L3Cs)

The Low-profit Limited Liability Company (L3C) is another purpose-driven entity, specifically designed to attract program-related investments (PRIs) from private foundations. L3Cs must have a primary charitable or educational purpose, with profit as a secondary goal.

Currently, L3C legislation exists in:

  • Illinois (805 ILCS 180/1-26)
  • Michigan (Mich. Comp. Laws § 450.4102)
  • Maine (Me. Rev. Stat. tit. 31, § 1611)
  • Rhode Island (R.I. Gen. Laws § 7-16-76)
  • Utah (Utah Code Ann. § 48-2c-412)
  • Vermont (Vt. Stat. Ann. tit. 11, §§ 4161-4163)
  • Wyoming (Wyo. Stat. Ann. § 17-29-102)

However, the IRS has never provided clear guidance confirming that L3Cs automatically qualify for PRIs, limiting their practical advantages. Several states have repealed their L3C statutes in recent years, including North Carolina and Louisiana, suggesting that this form may be losing momentum compared to benefit corporations and benefit LLCs.

International Equivalents

The benefit corporation movement is not limited to the United States. Several other countries have developed similar legal structures for purpose-driven businesses.

United Kingdom: Community Interest Companies

The United Kingdom introduced Community Interest Companies (CICs) in 2005 under the Companies (Audit, Investigations and Community Enterprise) Act 2004. CICs must pass a “community interest test” demonstrating that their activities benefit the community. They feature an “asset lock” that restricts dividend payments and ensures assets remain dedicated to community purposes. The CIC Regulator oversees these entities, which number over 20,000 today.

Italy: Società Benefit

Italy became the first country outside the United States to adopt benefit corporation legislation, introducing Società Benefit in 2016. Similar to U.S. benefit corporations, Società Benefit must pursue both profit and public benefit, consider stakeholder interests, and report annually on their social impact. Since implementation, hundreds of Italian companies have adopted this legal form.

France: Entreprise à Mission

France established the “Entreprise à Mission” status in 2019 through the PACTE Law (Plan d’Action pour la Croissance et la Transformation des Entreprises). Companies adopting this status must define a purpose beyond profit, have a mission committee to oversee progress, and report regularly on mission advancement. Major French companies including Danone have adopted this status.

Canada: Benefit Companies

British Columbia became the first Canadian province to allow benefit companies in 2020, following the model of U.S. benefit corporations. Under the British Columbia Business Corporations Act (Part 2.3), benefit companies must commit to conducting business in a responsible and sustainable manner while promoting public benefits.

Colombia, Ecuador, and Peru

Several Latin American countries have introduced benefit corporation legislation modeled after the U.S. approach. Colombia enacted its benefit corporation law in 2018, with Ecuador and Peru following suit in recent years.

These international developments demonstrate the global trend toward legal recognition of businesses that combine profit with purpose, though specific legal requirements and enforcement mechanisms vary by jurisdiction.

Practical Considerations for Entity Selection

When advising clients on whether to form as a benefit corporation or similar purpose-driven entity, attorneys should consider several practical factors:

Formation Process and Conversion

Forming a new benefit corporation follows procedures similar to forming a traditional corporation, with the addition of specific public benefit language in the articles/certificate of incorporation.

Existing corporations can convert to benefit corporations through:

  1. Amending their articles/certificate of incorporation
  2. Obtaining shareholder approval (usually by a two-thirds supermajority)

In California, conversion requires approval by at least two-thirds of each class of shares (Cal. Corp. Code § 14603). Delaware requires approval by 90% of outstanding shares of each class unless the certificate of incorporation specifies a different threshold (not lower than two-thirds) (DGCL § 363(a)).

Significantly, conversion triggers dissenters’ rights in many states, including California, allowing dissenting shareholders to demand fair value for their shares.

Tax Implications

Benefit corporations are taxed identically to traditional corporations—either as C corporations or, if they qualify and elect, as S corporations. The public benefit purpose does not confer tax-exempt status like 501(c)(3) organizations. However, benefit corporations may gain some tax advantages through:

  1. Deductible charitable contributions
  2. Potential tax credits for certain social or environmental initiatives
  3. Alignment with ESG (Environmental, Social, and Governance) criteria affecting investment decisions

Capital Raising Considerations

Benefit corporations may face both advantages and challenges in raising capital:

Advantages:

  • Appeal to impact investors and socially conscious capital
  • Qualification for ESG investment portfolios
  • Brand differentiation attracting values-aligned investors
  • Potential for patient capital seeking long-term value

Challenges:

  • Some traditional investors may perceive higher risk or lower returns
  • Additional reporting requirements could increase compliance costs
  • Less established track record as an entity type

Recent developments suggest that benefit corporations are increasingly successful in raising significant capital. Prominent examples include Patagonia, Kickstarter, and Laureate Education, which became the first publicly-traded benefit corporation in 2017.

Governance Implementation

Effective governance in benefit corporations requires careful attention to:

  1. Director education about expanded fiduciary duties
  2. Developing processes for measuring and reporting on public benefit
  3. Establishing clear decision-making frameworks that balance multiple stakeholders
  4. Creating board committees focused on public benefit aspects

Many benefit corporations adopt specific governance documents or policies outlining how directors should consider and weigh various stakeholder interests in their decision-making process.

Third-Party Certification: B Corp Certification vs. Benefit Corporation Status

A common point of confusion is the difference between being a “Certified B Corporation” and a “benefit corporation.” These are distinct but complementary concepts:

  • Benefit corporation is a legal status under state law
  • Certified B Corporation (or “B Corp”) is a private certification from the nonprofit B Lab

While benefit corporation status provides legal protection for considering non-financial interests, B Corp certification requires meeting specific performance standards on social and environmental impacts. Many companies choose both: legal benefit corporation status for legal protection and B Corp certification for credibility and recognition.

To obtain B Corp certification, companies must:

  1. Complete the B Impact Assessment and score at least 80 out of 200 points
  2. Meet B Lab’s transparency and legal requirements
  3. Pay annual certification fees based on revenue
  4. Recertify every three years

The Future of Benefit Corporations

The benefit corporation movement continues to gain momentum, with several trends likely to shape its future:

  1. Public Markets Entry: More benefit corporations are likely to go public, following Laureate Education’s lead. The SEC’s increasing focus on ESG disclosure may further advantage publicly-traded benefit corporations.
  2. Litigation Development: As benefit corporations mature, courts will eventually develop case law interpreting directors’ duties and enforcement mechanisms, providing greater clarity on legal protections and risks.
  3. International Harmonization: We may see efforts to harmonize benefit corporation standards across jurisdictions as multinational companies adopt these structures.
  4. Regulatory Integration: Government agencies and regulators increasingly recognize benefit corporations through preferential procurement policies, grants, and other incentives.
  5. Measurement Standardization: The development of more standardized metrics for measuring social and environmental impact will likely strengthen the benefit corporation ecosystem.

Frequently Asked Questions

What specific legal protections do benefit corporation directors have that conventional corporation directors don’t?

Benefit corporation directors have explicit legal protection to consider non-financial interests when making decisions. In a conventional corporation, directors risk breach of fiduciary duty claims if they prioritize social or environmental goals at the expense of shareholder value, particularly in change-of-control situations.

Under California law (Cal. Corp. Code § 14620(f)), benefit corporation directors cannot be held personally liable for monetary damages for failure to create general or specific public benefit. Delaware’s PBC law (DGCL § 365(b)) similarly shields directors from liability for good faith decisions balancing various stakeholder interests.

This protection is particularly valuable in acquisition scenarios. If a conventional corporation receives two competing offers—one with a higher price but detrimental social impact, and another with a lower price but preserved social mission—choosing the lower bid could expose directors to liability. Benefit corporation directors can legally consider factors beyond maximizing shareholder value.

Do benefit corporations have any tax advantages over traditional corporations?

Benefit corporations don’t receive automatic tax advantages simply by virtue of their legal form. They’re taxed identically to conventional corporations—either as C corporations subject to corporate income tax or, if eligible, as S corporations with pass-through taxation.

The public benefit purpose doesn’t confer tax-exempt status like 501(c)(3) nonprofit organizations. However, benefit corporations may indirectly realize tax advantages through:

  1. Tax-deductible charitable giving related to their public benefit purpose
  2. Tax credits or incentives for specific sustainability initiatives (such as renewable energy investments or workforce development programs)
  3. Reduced tax risk from investments in public benefit activities that might otherwise be questioned as improper business expenses in a conventional corporation

Some jurisdictions are beginning to provide tax incentives specifically targeting benefit corporations. For example, Philadelphia offers a tax credit for sustainable businesses including certified B Corporations. As benefit corporations become more established, we may see additional tax incentives at state and local levels.

How does a company convert from a traditional C corporation to a benefit corporation in California?

Converting an existing California C corporation to a benefit corporation requires:

  1. Board approval of an amendment to the articles of incorporation stating that the corporation is a benefit corporation
  2. Shareholder approval of the amendment by at least two-thirds of each class of shares (Cal. Corp. Code § 14603)
  3. Filing the amendment with the California Secretary of State

Importantly, the conversion triggers dissenters’ rights under California law. Shareholders who do not vote in favor of the amendment may require the corporation to purchase their shares at fair market value by following the appraisal procedures under California Corporations Code §§ 1300-1313.

Before conversion, companies should:

  • Conduct a thorough review of existing contracts and financing documents to identify provisions that might be affected
  • Develop systems for tracking and reporting on public benefit
  • Educate directors about their expanded fiduciary duties
  • Consider potential impact on business relationships and financing sources

After conversion, the corporation must prepare annual benefit reports meeting the requirements of Cal. Corp. Code § 14630, including assessment against a third-party standard.

What happens if a benefit corporation fails to produce its required benefit report?

The consequences of failing to produce the required benefit report vary by state. In California, there’s no specific statutory penalty for failure to produce a benefit report, but it may:

  1. Constitute a breach of fiduciary duty by directors
  2. Provide grounds for a benefit enforcement proceeding brought by shareholders
  3. Create reputation damage and potential consumer or investor backlash

Delaware’s more flexible approach makes benefit reporting optional unless specified in the certificate of incorporation, so failure to report would only have consequences if reporting was explicitly required in the governing documents.

While enforcement mechanisms for benefit reporting are generally limited, the market provides a powerful incentive for compliance. Investors, customers, and partners focused on social impact will likely view reporting failures as a red flag. Additionally, repeated non-compliance undermines the credibility of a company’s commitment to its stated public benefit purpose.

How do benefit corporations differ from certified B Corporations?

The distinction between benefit corporations and Certified B Corporations is crucial yet frequently misunderstood:

Benefit corporation is a legal status under state corporation law. It provides legal protection for considering stakeholder interests beyond shareholders but doesn’t require meeting any specific performance standards. Any corporation can become a benefit corporation by following the proper legal procedures, regardless of its actual social or environmental performance.

Certified B Corporation (or “B Corp”) is a private certification awarded by the nonprofit organization B Lab to companies that meet specific performance standards. To become certified, a company must:

  • Complete the B Impact Assessment and score at least 80 out of 200 points
  • Pass a risk review process
  • Meet legal requirement (which often involves becoming a benefit corporation)
  • Pay annual certification fees based on revenue

A company can be a benefit corporation without being a Certified B Corp, and theoretically, a company could be a Certified B Corp without being a benefit corporation (though B Lab now typically requires U.S. companies to adopt benefit corporation status when available in their state).

Many companies choose both: legal benefit corporation status for legal protection and B Corp certification for credibility, recognition, and community membership.

Can benefit corporations pay dividends to shareholders?

Yes, benefit corporations can distribute dividends to shareholders just like conventional corporations. Nothing in benefit corporation statutes restricts or limits dividend payments. The ability to distribute profits to investors is a key distinction between benefit corporations and nonprofit organizations.

However, benefit corporation directors must consider their broader fiduciary duties when determining dividend policies. If aggressive dividend distributions would undermine the corporation’s ability to pursue its public benefit purpose, directors might have a duty to limit such distributions.

Some benefit corporations adopt dividend policies that explicitly balance shareholder returns with reinvestment in social or environmental initiatives. For example, a benefit corporation might commit to distributing a certain percentage of profits as dividends while allocating another percentage to public benefit activities.

It’s worth noting that some international equivalents, such as the UK’s Community Interest Companies, do place statutory caps on dividend distributions to preserve assets for community benefit.

What happens if a benefit corporation is acquired by a non-benefit corporation?

When a benefit corporation is acquired by a non-benefit corporation, several scenarios could unfold, depending on the structure of the transaction:

  1. Entity Preservation: If the transaction is structured as a stock purchase where the benefit corporation continues to exist as a subsidiary, it generally retains its benefit corporation status and associated legal obligations. The parent company would need to respect the subsidiary’s public benefit purpose.
  2. Merger or Conversion: If the transaction involves merging the benefit corporation into a non-benefit corporation or converting it to a traditional corporation, this would typically require:
    • Board approval considering the impact on the public benefit purpose
    • Shareholder approval at the supermajority threshold required for status changes (two-thirds in California, 90% in Delaware unless otherwise specified)
  3. Mission Protection Provisions: Some benefit corporations adopt additional protections in their governing documents or acquisition agreements, such as:
    • Requirements that the acquirer maintain the public benefit purpose
    • Financial penalties for abandoning the mission
    • Creation of a separate foundation to continue mission-related work

While benefit corporation status provides some protection against hostile acquisitions that would abandon the social mission, it doesn’t prevent acquisitions altogether. The most effective protection comes from mission-aligned investors and governance structures that maintain control with purpose-driven stakeholders.

Notable examples include Patagonia, which transferred ownership to a purpose trust and nonprofit to permanently protect its environmental mission, and Etsy, which abandoned its B Corp certification after pressure from conventional investors following its IPO.

How do courts enforce the public benefit obligations of benefit corporations?

Enforcement of benefit corporations’ public benefit obligations primarily occurs through “benefit enforcement proceedings” brought by shareholders or, in some states, directors. These proceedings are still relatively untested in court, with limited case law to date.

In California, under Cal. Corp. Code § 14623, a benefit enforcement proceeding may be commenced by:

  • The benefit corporation itself
  • A director
  • A shareholder
  • A person or group owning 5% or more of the equity of the benefit corporation’s parent company

Delaware takes a more restrictive approach, limiting standing to shareholders owning at least 2% of outstanding shares (or $2 million in market value for publicly traded PBCs) (DGCL § 367).

Importantly, monetary damages are typically not available for failure to pursue public benefit. In California, directors cannot be held personally liable for monetary damages for failure to create general or specific public benefit (Cal. Corp. Code § 14620(f)). Available remedies generally include injunctive relief or court orders requiring specific performance.

The limited litigation to date suggests that courts will likely apply a modified business judgment rule to benefit corporation decisions, giving directors substantial discretion in balancing stakeholder interests while requiring genuine consideration of public benefit.

How do benefit corporations interact with securities laws?

Benefit corporations are subject to the same securities laws as traditional corporations. When raising capital, they must comply with federal securities laws, including:

  1. Registration requirements under the Securities Act of 1933 (unless an exemption applies)
  2. Anti-fraud provisions prohibiting material misstatements or omissions in connection with securities offerings
  3. For publicly traded benefit corporations, periodic reporting under the Securities Exchange Act of 1934

The dual mission of benefit corporations creates both challenges and opportunities in securities law compliance:

Challenges:

  • Disclosure of novel risks related to balancing profit and purpose
  • Potential materiality questions regarding social and environmental impacts
  • Complex valuation issues for companies prioritizing impact alongside financial returns

Opportunities:

  • The SEC’s increasing focus on ESG disclosure may advantage benefit corporations already tracking social and environmental metrics
  • Benefit corporations’ transparent reporting practices align with growing investor demand for sustainability information
  • Benefit corporation status may provide defense against securities claims alleging failure to maximize short-term shareholder value

Attorneys advising benefit corporations on securities offerings should ensure offering documents accurately disclose:

  • The nature and implications of benefit corporation status
  • How pursuing public benefit might affect financial returns
  • Specific social or environmental objectives and how progress is measured
  • Governance structures for balancing stakeholder interests

As the number of publicly traded benefit corporations grows, we can expect further development of specialized disclosure practices and potentially SEC guidance specific to these entities.