Up April 2010, the choice when incorporating a not-for-profit entity was a C (sometimes termed a “regular”) corporation. Now, there’s a new choice- the B corporation, a benefit corporation. This new corporate entity exists “for profit”- but is, theoretically, charged to benefit stakeholders OTHER than shareholders. At least, if you plan to incorporate in the following states- New York, New Jersey, California, Virginia, Hawaii, Vermont, Colorado, North Carolina, Pennsylvania, Michigan, Washington, and the first state to do so- Maryland, you can form a B corporation.
A B corporation not only lets one provide a public good, but it can benefit the stockholders, as well. But, it’s not clear why these entities are really needed- unless one believes that Directors never consider their actions on stakeholders, the environment, or society, but only consider the stockholders point of view. And, it’s still not clear to me that a B corporation truly keeps the interests of society or the stakeholders primary, since the legal foundation stipulates that they consider the impact on the shareholders first (or at least the model B corporation legislation lists them first).
The proponents claim that the entity is critical in that Directors are shielded from liability, when they consider the needs and interests of those who are not shareholders of the entity. In other words, they can’t be sued if they don’t try to maximize the value to the shareholders with every decision they make. However, most states (31 of them) already have “constituency statutes” that permit Directors to do so. Moreover, in spite of what you may hear, maximizing shareholder value is a choice and not an obligation for corporations. For example, when was the last time you heard that Directors were to be sued when they decided to NOT accept tender offers from another firm that is offering premiums of 20% or more over the existing stock price? Moreover, there is no obligation that B corporations preferentially take stakeholder considerations or environmental concerns, or societal needs over those of the shareholders.
So, I, for one, will still recommend forming a C corporation. But, I also hope that the entrepreneurs involved in the effort choose Directors that balance the need of stockholders AND stakeholders. Unless, of course, the true aim of the entity is to provide for the public good- and then the needs of society and stakeholders other than shareholders should always reign supreme.
While I don’t always understand the stock market lingo, I get the gist of what you’re saying & why ; )
Jenny,
Part of every issue is the vocabulary employed. And, the vocabulary is often chosen or developed to insure communication among certain stakeholders and to exclude others.
To change the subject slightly, it’s why using the term “insure voting integrity” is chosen- rather than “exclude the young, the Black, the Hispanic, and the poor”.
Roy
People in congress have to invent things to prove to their constituents that they are doing their work. Too bad they don’t know when to leave well enough alone. This, btw, is as political as I get, since most of the stuff politicians do is unconstitutional. Give em hell, Roy.
Ann, Ann, Ann…
Congress has nothing to do with this issue. Corporations are formed under the aegis of a state or a commonwealth. They set the standards, which is why many a C corporation knows that Delaware is the preferred venue to incorporate because of its special court system and friendly laws and why Virginia is the preferred choice for LLC entities for the same reasons.
Roy
So is this like a non-profit that can show a profit? Not sure I understand what “stakeholders” are…. ?
Carolina HeartStrings recently posted..BLUE CHEESE – BACON CORN MUFFINS
It is confusing, Alessa.
It is NOT really a non-profit. But, then, again, many non-profit entities are not really charities, as we would normally consider, but are arranged to benefit the executives of the organization. I am sure you can recall a variety of organizations that fit this category. Without naming names, there are many “not-for-profit” entities that “certify products and organizations for various activities. And, the entity pays its executives salaries approaching $ 1 million or so. One could argue the organization is providing a “public service”, but many of these services are already provided by another organization.
But, that was not the intent of those proposing B companies, per se. Let’s say I have developed a new engine, one that uses alternative fuels, as well as conventional fuels. One that should halve our consumption of fuel per mile. (Oh, wait, we did this about four decades ago with a variation of the Stirling engine.) But, not only do I wish to commercialize this engine, make some money, and “help the environment”, I wish to use 50% of the profits for environmental education efforts. That’s the intent of the B corporation. The fact that I can already do that with a C corporation is my response, however.
And, now to your other query. A stakeholder is anyone with a “stake” in the organization. That would include shareholders (who who owns a portion of the company), employees (who have a stake in the future of the organization), customers/clients (a stake in the products/services the organization offers), the neighbors to the plants/offices (who have a stake in the local environmental conditions that pertain near the organization’s sites), and the suppliers to that organization (consider the various suppliers to GM who would have been affected had GM failed, prior to its bailout), etc.
Roy
Sometimes I feel guilty about clicking the box that informs your blog that I am not a spammer, because I feel like my comment is as useless as spam. This is one of those comments. It is a confusing concept especially since as you describe in your comment to Carolina that C corps can already do that so why do we need a B….So I guess I have to go back to my concept that the more words there are in a law the more loopholes there are as well. It may be me being a cynic, but this just seems to be another corp that can have more loopholes. It’s also why when I have to incorp in the past I let my lawyer advise me. LOL Great post, sorry I am a day late on my comment.
Lisa Brandel recently posted..The Painted Lady by Lisa Brandel
Some folks seem to be more than a little paranoid, Lisa. Also, I think some folks are trying to get a little more credit for their “social benefits” than they would had they not opted for B. But, that’s must my impression…
R
Hi, Roy!
Can directors of B corporations be sued for not causing benefits to stakeholders? If that is the case, oil companies are not likely to choose that option.
Gustavo recently posted..Do blind people dream?
Gustavo:
This is America. One can be sued for anything! Whether it has merit or not, but that is a subject for another post… (like the one I did write about last month.. https://www.adjuvancy.com/wordpress/http:/www.adjuvancy.com/wordpress/land-free-land-sue/
By the way, the judge threw out that case, as was reported here… http://newyork.cbslocal.com/2012/05/25/morris-county-judge-to-decide-if-text-sender-liable-for-wreck/