Benefit Corporations Expand but not Without Criticism (Part Two)

Despite the growing support for and recognition of benefit corporations, not all are enthused about this new business entity form.   Some question the need for a special “benefit” designation noting that any corporation can choose to be socially responsible.  Many firms today that are not “benefit corporations” pursuant to relevant statute still seek to promote social goals.  For example Target gives 5% of store profits to local causes.   Pepsi chose not to advertise in the 2010 Super Bowl but rather used those anticipated advertising costs to fund various socially-beneficial projects through its Pepsi Refresh campaign.  Chipotle advertises organic products and costs more than Taco Bell. Starbucks advertises “sustainably grown coffee” that costs more than the gas station alternative. Clearly for profit corporations can today do good and be socially responsible.

Further, to the extent that the social benefit identified by a benefit corporation requires the corporation to make large contributions to various causes it may run into tax issues.  It is not at all clear (in fact it seems unlikely) that such contributions would be deductible since it is likely questionable whether a sizeable contribution by a for-profit corporation would be an “ordinary and necessary business expense” IRC §162(a). Business gifts are limited to $25 per recipient per year. IRC §274(b)(1).  Further,  the deductibility of corporate charitable contributions is limited to 10% of taxable income each year. IRC §170(b)(2).

If benefit corporation status is granted, problems with assessment are likely.  From an external perspective, investors and others may not be aware of the choice of form.  There is no way to distinguish a Benefit Corporation from any other corporation established under state corporation codes without a close analysis of their charter documents.  Internally, how, exactly, does an entity determine the extent to which it has promoted “a material, positive impact on society and the environment” is not clear.

For now, most benefit corporation statutes leave that determination to  the review of an unidentified, non-governmental third party. (which is often B Lab—the very entity encouraging the passage of benefit corporation legislation in the first instance).  The recent problems with private third-party ratings agencies to maintain independence and provide consumer protection, suggests that this may not be the best solution.  Further, most legislation provides no guidance to any rating agency.  There is no suggested criterion or standard by which benefit corporations are to be evaluated.

The lack of governmental oversight causes concern to some critics of the form who worry that the benefit corporation format could allow bad actors to mislead the public and could give investors a false sense of security. Because the new form is not monitored by government agencies to ensure compliance with statutory requirements there is little official oversight of benefit corporations operations or adherence to their stated mission. “They have to promise to do good but they don’t have to do good” said Jan Masaoka, the CEO of the California Association of Nonprofits. 

 Benefit corporations that elect a specific public benefit may face unintended consequences. Depending on the identified benefit, the relevance or usefulness of pursuing that specific public benefit may go away if the objective is achieved.  Alternatively, the corporation may experience mission creep or mission fatigue, problems not uncommon at non-profits targeting specific social goals.   At that point, what happens?  Do the shareholders then vote to choose a new specific public benefit or revert to a traditional corporation? Does this create regulatory responsibility and associated costs to ensure that Benefit Corporations select a new specific public benefit?

Whether these concerns outweigh the advantages of benefit corporation status is a topic for debate.  At the least it suggests that state legislatures considering enacting benefit corporation legislation proceed with caution and deliberation.