This semester in Professor Lisa Mazzie’s Advanced Legal Writing: Writing for Law Practice seminar, students are required to write one blog post on a law- or law school-related topic of their choice. Writing blog posts as a lawyer is a great way to practice writing skills, and to do so in a way that allows the writer a little more freedom to showcase his or her own voice, and—eventually for these students—a great way to maintain visibility as a legal professional. Here is one of those blog posts, this one written by 3L Nikki Paterson.
As a student associate in Marquette’s Law and Entrepreneurship Clinic, I see many start-up companies struggle with entity selection. It can be a difficult decision because founders have to consider liability, management structure, employee compensation, formation formalities, future investments, and tax implications, among other things.
As of February 26, 2018, the decision-making process got even harder. That is when 2017 Wisconsin Act 77 took effect, which recognized a new type of entity: benefit corporations. Far from being a trailblazer, Wisconsin was the 34th state to adopt such legislation.
So what is a benefit corporation? A benefit corporation is a type of corporation that places social and environmental values on equal footing with profits; in other words, a corporation with a “triple bottom line.” Chapter 204 of the Wisconsin Statutes specifies the process and requirements of incorporating a benefit corporation.
Formation procedures of a benefit corporation are essentially the same as general corporations with a few added requirements, such as a general public benefit statement and a benefits director. A benefit corporation’s articles of incorporation must have a purpose of creating a “general public benefit” (defined as “a material positive impact on society and the environment”). The company may also provide specific public benefits, which are listed in the statute.
Unlike a corporation, a benefit corporation must also elect a benefits director. A benefits director has the same responsibilities and duties of a board member, except they may also have additional responsibilities as outlined in the company’s articles of incorporation. Typically, the benefits director will be responsible for preparing the company’s annual benefit statement.
Annual Benefit Statement
Because a benefit corporation is organized with the purpose of providing a public benefit, it must provide its shareholders with an annual benefit statement within 30 days of its fiscal year end. The annual benefit statement assesses the company’s efforts at achieving its public benefit or describes the circumstances that hindered that achievement.
Benefit corporation status does not affect a company’s tax status. Like a general corporation, a benefit corporation can elect to be taxed as a C-corporation or S-corporation.
A benefit corporation can revert to a general corporation, and cease being a benefit corporation, by amending its articles of incorporation to delete the general public benefit statement.
There is a lot of confusion about the difference between a benefit corporation and a B-Corp. A benefit corporation is a legal entity formed under a state’s legislation. A B-Corp, on the other hand, is a certification that any type of entity can earn through a third-party called B-Lab. B-Lab is a nonprofit organization, and its annual fees to certify a company as a B-Corp range from $500 to $50,000, based on revenue. It can therefore be quite expensive to maintain certification.
A company can be both a benefit corporation and a certified B-Corp. In fact, B-Lab requires companies comply with state benefit legislation, if any, within two years of enactment to earn certification. For additional information about B-Corps and certification requirements, visit https://www.bcorporation.net/.
Is a benefit corporation the right entity choice for your start-up? The answer, predictably, is it depends.
Start-up companies are in desperate need of capital to fund their idea and launch their business. Founders are therefore always looking for new ways to pitch their business to investors. For some businesses, organizing as a benefit corporation could be a good way to do that. If a business’s mission and main strategic advantage is that it is for the social good or is environmentally friendly, then a benefit corporation status could signal to investors that the business is serious about its mission.
However, with new legislation comes uncertainty. The body of law dealing with general corporations is well established, but it is unclear how the courts will interpret and enforce the new legislation creating benefit corporations. Because investors are already taking on considerable risk investing in start-up companies, one organized as a benefit corporation may be seen as adding unnecessary risk to that investment.
The bottom line: Speak with an attorney about whether forming a benefit corporation is the right decision for your start-up.