The Socially Conscious Entity: Public Benefit Corporations
The public benefit corporation (“PBC”) is a relatively new corporate structure. In 2014, Colorado joined a minority of states by passing the “Public Benefit Corporation Act of Colorado,” legislation enabling the incorporation of PBCs. This legislation allows both new and existing corporations to become PBCs. Currently, PBCs are authorized by 35 U.S. states and the District of Columbia.
What is a public benefit corporation?
A PBC is a for profit corporation or domestic cooperative that is intended to (1) produce one or more public benefits and (2) operate in a responsible and sustainable manner. A PBC must be managed in a manner that balances the shareholders’ pecuniary interests, the best interests of those materially affected by the corporation’s conduct, and the public benefit(s) identified in its articles of incorporation. In contrast to a traditional corporation, a public benefit corporation considers its impact in addition to profits for its shareholders.
What are “public benefits”?
In the Public Benefit Corporation Act, the Colorado legislature defined public benefit broadly. A public benefit is any positive effect(s) or reduction of negative effect(s) on one or more groups of people, entities, communities, or interests, including effects of an artistic, charitable, cultural, economic, educational, literary, medical, religious, scientific, or technological nature, but not including the interests of shareholders in their capacities as shareholders.
How can an existing entity convert into a public benefit corporation?
As mentioned, the Public Benefit Corporation Act allows existing corporations to become a PBC. There are two main ways to do this, but you should first identify one or more specific benefits to promote.
The first method of conversion is statutory conversion. To do this, the directors of the corporation, or the managers of the LLC, need to create a plan of conversion that explains how the ownership interests of the existing entity convert into the ownership interests of the PBC (among other things). The directors or managers then submit the plan to the shareholders or members for a vote. If the plan is approved by a two-thirds majority, the company must file a statement of conversion with the Secretary of State’s office, along with the PBC’s articles of incorporation. Once that is filed, you are officially a public benefit corporation and may begin running the company as such.
The second way is less of a “conversion,” as it requires dissolving the existing entity and setting up a new PBC. The reason to take this course of action is if the company ownership, management, or operations will look significantly different under the new entity. For example, if your LLC has two members who split everything 50/50, and your PBC will take on three new owners who will each be contributing different types of property or services in exchange for their stock, it will likely be simpler to take this course of action.
What must I include in the Articles of Incorporation for a public benefit corporation?
The articles of incorporation for a PBC are generally the same as other corporations. First, you must state at the beginning of the articles of incorporation that it is a PBC. You also need to state the domestic entity name for the PBC, which, in the case of a PBC, should contain the words “public benefit corporation,” or the abbreviation “P.B.C.,” “PBC,” or “Pub. Ben. Corp.” You need to include information regarding shares and the registered agent’s name and address. In addition, include the principal office address of the PBC and the name and address of each incorporator.
While the purpose of business is not usually necessary, the articles of incorporation for a PBC must identify within its statement of business or purpose the specific public benefit(s) to be promoted by the PBC.
If a company decides not to contain the PBC designation in its name, it must, before issuing shares, provide notice to any investor of its PBC status before selling the shares.
What are the directors' duties?
Colorado law requires that the board of directors manage or direct the business and affairs of a PBC in a manner that balances the pecuniary interests of the shareholders, the best interests of those materially affected by the corporation’s conduct, and the specific public benefit(s) identified in its articles of incorporation. This means that directors consider the company’s social and environmental impacts in addition to how the company can profit for its shareholders. A director will satisfy this duty if the director’s decision is both informed and disinterested and not a decision which no person of ordinary, sound judgment would approve.
The director(s) of a PBC does not have a duty to any person on account of (1) an interest of the person in the public benefit(s) identified in the articles of incorporation or (2) an interest materially affected by the corporation’s conduct.
What are a PBC’s annual requirements?
A PBC must also prepare an annual benefit report with (1) a description of how the company promoted the public benefit(s) listed in the company’s articles of incorporation and any obstacles the company faced in promoting the public benefit(s), and (2) an assessment of the overall social and environmental performance of the company against a third-party standard.
Is a PBC director personally liable for corporate acts?
Colorado law protects directors of public benefit corporations from suits. However, as is the case with traditional corporations, directors may be liable if the corporate veil is pierced. One way the corporate veil may be pierced for public benefit corporations is if directors fail to file and distribute the annual benefit reports. However, these issues have yet to be addressed in court because the concept of a public benefit corporation is fairly new.
What is the difference between a Colorado public benefit corporation and a Certified B Corporation?
A Colorado public benefit corporation is a legal entity organized under Colorado law. In contrast, a Certified B Corporation (“B Corp”) is a special designation that was created by a non-profit organization called B Lab, which certifies corporations that meet B Lab’s requirements. To learn more about B Corps, read our blog here.
I’m not sure I want to structure a public benefit corporation, what other options do I have?
While a great option, a PBC is not the only entity option for a more socially conscious entrepreneur. Limited liability companies are great because they do not have many statutory obligations. The owners of a limited liability company can agree to operate the company in any way they desire, including by requiring the managers of the company to manage the company as if it were a Colorado public benefit corporation. The benefit over a PBC is that an LLC does not require filing of an annual benefit report.
For certain undertakings, a non-profit corporation may be the appropriate choice. Though they are not great if you need to make money. Though directors of a regular corporation may not be able to consider the full range of interests that directors of PBCs are required to consider, there are many ways to promote public benefits in a regular corporation.
If you’re interested in making your business a public benefit corporation or a Certified B Corporation, fill out an interest form today to see if GLO can help you.
GLO has prepared this blog to provide general information on legal issues that may be of interest. This blog does not provide legal advice for any specific situation and this does not create an attorney-client relationship between any reader and GLO or its attorneys. GLO engages clients only through specific fee arrangements and signed engagement letters. GLO does not guarantee any results.