Tuesday, August 26, 2014

The March of the Benefit Corporation: Next Up, West Virginia (Cross Post)

West Virginia is the latest jurisdiction to adopt benefit corporations – the text of our legislation can be found here.   As with all benefit corporation legislation, the thrust of West Virginia’s statute is to provide a different standard of conduct for the directors of an otherwise for-profit corporation that holds itself out as being formed, at least in part, for a public benefit.  (Current and pending state legislation for benefit corporations can be found here.)

As WVU Law has two members of the ProfBlog family in its ranks (Prof. Josh Fershee (on the Business Law Prof Blog) and Prof. Elaine Waterhouse Wilson (on the Nonprofit Law Prof Blog)), we combined forces to evaluate benefit corporations from both the nonprofit and the for-profit sides.  For those of you on the Business Prof blog, some of the information to come on the Business Judgment Rule may be old hat; similarly, the tax discussion for those on the Nonprofit Blog will probably not be earth-shaking.  Hopefully, this series will address something you didn’t know from the other side of the discussion!

Part I: The Benefit Corporation: What It’s Not:  Before going into the details of West Virginia’s legislation (which is similar to statutes in other jurisdictions), however, a little background and clarification is in order for those new to the social enterprise world.  A benefit corporation is different than a B Corporation (or B Corp).  B Lab, which states that it is a “501(c)(3) nonprofit” on its website, essentially evaluates business entities in order to brand them as “Certified B Corps.” 

It wants to be the Good Housekeeping seal of approval for social enterprise organizations.  In order to be a Certified B Corp, organizations must pass performance and legal requirements that demonstrate that it meets certain standards regarding “social and environmental performance, accountability, and transparency.” Thus, a business organized as a benefit corporation could seek certification by B Lab as a B Corp, but a business is not automatically a B Corp because it’s a state-sanctioned benefit corporation – nor is it necessary to be a benefit corporation to be certified by B Labs.  

In fact, it’s not even necessary to be a corporation to be one of the 1000+ Certified B Corps by B Lab. As Haskell Murray has explained,

I have told a number of folks at B Lab that "certified B corporation" is an inappropriate name, given that they certify limited liability companies, among other entity types, but they do not seem bothered by that technicality.  I am guessing my fellow blogger Professor Josh Fershee would share my concern. [He was right.]

A benefit corporation is similar to, although different from, the low-profit limited liability company (or L3C), which West Virginia has not yet adopted. (An interesting side note: North Carolina abolished its 2010 L3C law as of January 1, 2014.)  The primary difference, of course, is that a benefit corporation is a corporation and an L3C is a limited liability company.  As both the benefit corporation and the L3C are generally not going to be tax-exempt for federal income tax purposes, the state law distinction makes a pretty big difference to the IRS.  The benefit corporation is presumably going to be taxed as a C Corporation, unless it qualifies and makes the election to be an S Corp (and there’s nothing in the legislation that leads us to believe that it couldn’t qualify as an S Corp as a matter of law).   By contrast, the L3C, by default will be taxed as a partnership, although again we see nothing that would prevent it from checking the box to be treated as a C Corp (and even then making an S election).   The choice of entity determination presumably would be made, in part, based upon the planning needs of the individual equity holders and the potential for venture capital or an IPO in the future (both very for-profit type considerations, by the way).  The benefit corporation and the L3C also approach the issue of social enterprise in a very different way, which raises serious operational issues – but more on that later. 

Finally, let’s be clear – a benefit corporation is not a nonprofit corporation.  A benefit corporation is organized at least, in some part, to profit to its owners.  The “nondistribution constraint” famously identified by Prof. Henry Hansmann (The Role of Nonprofit Enterprise, 89 Yale Law Journal 5 (1980), p. 835, 838 – JSTOR link here) as the hallmark of a nonprofit entity does not apply to the benefit corporation.  Rather, the shareholders of a benefit corporation intend to get something out of the entity other than warm and fuzzy do-gooder feelings – and that something usually involves cash.

In the next installments:

Part II – The Benefit Corporation: What It Is.

Part III – So Why Bother?  Isn’t the Business Judgment Rule Alive and Well?

Part IV – So Why Bother, Redux? Maybe It’s a Tax Thing?

Part V - Random Thoughts and Conclusions

EWW & JPF

http://lawprofessors.typepad.com/business_law/2014/08/the-march-of-the-benefit-corporation-next-up-west-virginia-cross-post.html

Business Associations, Corporations, Entrepreneurship, Joshua P. Fershee, LLCs, Social Enterprise | Permalink

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Comments

Thanks Josh and Elaine. One note: a couple of states (Maryland and Oregon) have passed statutes that allow for Benefit LLCs. From a business law perspective, there is even less reason to pass a Benefit LLC statute than a Benefit Corp. statute, but if firms are mostly using the social enterprise forms as signaling devices, then maybe the Benefit LLCs make some sense. Most social enterprises are quite small and often would be better off using an LLC framework than a corporate law one.

Posted by: Haskell Murray | Aug 26, 2014 3:30:41 PM

Thanks for this great post and the promise of more, Josh. I look forward to the entire series.

You say: "As with all benefit corporation legislation, the thrust of West Virginia’s statute is to provide a different standard of conduct for the directors of an otherwise for-profit corporation that holds itself out as being formed, at least in part, for a public benefit." Of course, this begs the question of how businesses ensure compliance with, and how courts will enforce, that new standard of conduct. Add the questions lawyers surely must have in advising benefit corporations in the absence of decisional law (or other) guidance, and you have a possible train wreck (or at least an uncomfortable environment). If the "other constituency" statutes experience is at all instructive, we may not have a great answer on what benefit corporation law means for many years (if at all) . . . .

So, adding to the list of what benefit corporations are not . . . well . . . they are not a cure-all for the perceived woes associated with the shareholder wealth maximization norm (if, in fact, there is such a norm). In short, benefit corporations are not sure to achieve their policy aims. While judges and legal counsel cannot ignore the statutes and the policies underlying them, until the courts and practice community together coherently develop the doctrine through experience (and that may or may not happen), we don't have much at all.

Of course, I am sure you intend to handle these and other related points in the “what benefit corporations are” or “so why bother?” parts of the blog series . . . . Have at it, brother.

Posted by: joanheminway | Aug 27, 2014 2:10:15 PM

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