New business startups are sometimes driven by strong social motivation, but still need investment capital to form and survive. This puts them at a crossroad: do they go nonprofit and non-stock or conventional corporation? Now, Wisconsin, joining 33 other states, has another alternative: the benefit corporation.
Nonprofit vs. For Profit
Nonprofit corporations must have certain characteristics in order to qualify as exempt entities under section 501(c) of the Internal Revenue Code. Charitable organizations qualify under 501(c)(3). Such qualification requires a charitable “purpose” and further requires that in no case may the corporation dissolve and distribute anything to its members or board, but instead, must go to another similarly organized entity. It also allow its donors to deduct contributions to the organization. Its income is not taxed.
Thomas G. Schober, Marquette 1972, is an attorney with Schober Schober & Mitchell, S.C., Oconomowoc, where he focuses on business, taxation and real estate, with extensive transactional experience in mergers and acquisitions and complex real estate matters.
If an entity is motivated to protect investor’s capital, make a return on such capital and distribute proceeds upon dissolution to its owners, then it is a “for profit” entity. As such, its income is taxed.
In the past, such entities could not “crossover.” They were one or the other.
With the enactment on Nov. 27, 2017of Wis. Stat. chapter 204: Benefit Corporations (effective Feb. 25, 2018), Wisconsin now allows corporations to be profit-driven and exist to promote one or more public purposes.
Why is this so important? Because, in the past, the directors of a nonprofit had no owners to be responsible to. They promulgated the nonprofit’s purpose, regardless of its impact upon the bottom line.
Directors of profit corporations owe a fiduciary obligation to the owners to act in their best interests — which oftentimes meant they had to act primarily in consideration of what their actions would do to the bottom line.
In addition, for-profit directors could consider three other factors in their decision making:
- the effect upon employees
- the impact upon customers
- how their actions would be perceived by the communities within which they served
Under the new Chapter 204, benefit corporation directors may now consider the following additional factors:
- the effect upon subsidiaries and suppliers
- any impact upon the local or global environment
- the interests of customers as beneficiaries of the corporation’s benefit purposes
- the short-term and long-term interests of the corporation
- the ability and extent to which it may accomplish the corporation’s benefit purposes
- other factors the directors or officers deem important
Note how the last item is a huge “catch all”!
‘Public Benefits’ and Transparency
So, what are these “public benefits” that the new benefit corporation must espouse?
“A benefit corporation shall have a purpose of creating general public benefit.”1 A “general public benefit” is “a material positive impact on society and the environment by the operation of a benefit corporation taken as a whole, through activities that promote some combination of specific public benefits.”2
Under section 204.120(7): Specific public benefits, are:
- Providing low-income or underserved individuals or communities with beneficial products or services.
- Promoting economic opportunity for individuals or communities beyond the creation of jobs in the normal course of business.
- Preserving the environment.
- Improving human health.
- Promoting the arts, sciences, or advancement of knowledge.
- Increasing the flow of capital to entities with a public benefit purpose.
- The accomplishment of any other particular benefit for society or the environment.
The owners may sue directors who fail to consider the corporation’s benefit purposes. Directors are broadly protected if they do.3 There shall be a designated “benefit director” who shall have the powers to carry out the statute’s intent.4
The law promotes transparency, inasmuch as the corporation has to provide its shareholders an annual statement that includes:
- objectives to promote public benefits, as set by the board
- standards the board adopted to measure progress
- factual information regarding the success of meeting objectives
- an assessment regarding the success of meeting objectives
The articles or bylaws may extend such transparency by making such statement available to the public.5
A New Way to do Business
While the concept of a benefit corporation is quite new, it may be the right form to do business for owners who are motivated to solve social or environmental issues.
It assures such owners continued control in order to achieve such goals. Such goals may be used to promote the corporation and may be seen by others dealing with the corporation as a consideration when doing so. Employees may be drawn by such purpose; customers may choose to buy from such a company; communities may be proud to bring such operations into their midst; and owners may benefit by improving the world and making a profit at the same time!
For more information on benefits corporations, see:
This article is originally posted in the Wisconsin Business Law Blog, published by Schober Schober and Mitchell, S.C.
1 Wis. Stat. section 204.201(1)
2 Wis. Stat. section 204.120(5)
3 Wis. Stat. section 204.301(3)
4 Wis. Stat. section 204.302
5 Wis. Stat. section 204.401