Accountability: How Benefit Corporations and Social Purpose Corporations Differ

Accountability: How Benefit Corporations and Social Purpose Corporations Differ

By Jeremy Chen

How are the Benefit Corporation and the Social Purpose Corporation (SPC) different in regards to enforcement of corporate accountability to social and environmental purposes? The short answer is that Benefit Corporations have stronger statutory provisions to ensure accountability to stated social and environmental goals than SPCs do.

Reporting Requirements

The statutes governing Benefit Corporations and SPCs both contain provisions calling for a report assessing the corporation’s social and environmental performance. The difference between the two boils down to using an independent third party standard to assess the company’s social and environmental performance.

The SPC must generate an annual report that includes a management discussion and analysis (MD&A) of its plan and progress toward achieving its special purpose. In addition, the board of directors of a SPC must send a current report to shareholders within 45 days when the SPC makes or withholds any expenditure of resources in furtherance of its special purpose objectives; or determines that the special purpose has been satisfied or should no longer be pursued.

The Benefit Corporation is required to produce an “annual benefit report” that must include its own or independently conducted assessment of the company’s overall social and environmental performance based on a standard created by an independent third party standard (e.g. B Corp certification via B LabSASB standards, or others). A Benefit Corporation’s report must also include an assessment of its efforts on multiple aspects of social responsibility including its effects on society and the environment. In comparison, the SPC does not need to use a third-party standard in preparing its reports.

Previously, a SPC could waive its requirement to produce a special purpose MD&A if it had fewer than 100 shareholders and two-thirds of those shareholders approved it. Tthat waiver, however, was eliminated last year to increase accountability. The MD&A is now required for all SPCs as of January 1, 2015.

Benefit Enforcement Proceeding

Another aspect that gives a Benefit Corporation more teeth in enforcing accountability is the statutory provision allowing the Benefit Corporation itself, or derivatively through a shareholder or director (or other persons provided for by statute), to bring a benefit enforcement proceeding against an officer or director for violating their duties regarding the Benefit Corporation’s public benefit purpose. This proceeding does not allow for monetary damages, but provides injunctive relief (i.e. legally force a party to stop acting against the interest of the Benefit Corporation’s public benefit interests or purpose). The SPC has no comparable statutory provisions for enforcement of its special purpose, which leaves the corporation and its shareholders with no internal corporate recourse to compel directors and officers to carry out the SPC’s special purpose.

Who can benefit from these types of forms?

The Social Purpose Corporation can be beneficial for emerging social enterprises with smaller teams or companies, regardless of size, that want more operational flexibility. Smaller SPCs can save time and resources when it comes to generating an annual report because their performance does not need to be measured against a third-party standard. Mid-size to larger companies can benefit from the flexibility this form offers in being able to select its own special purpose, while maintaining accountability and transparency to the public.

The Benefit Corporation’s can be beneficial for social entrepreneurs that want to root their mission in the company. The stronger reporting requirements and enforcement proceedings make it a corporate form worth its salt in accountability, and social entrepreneurs can use these statutory accountability measures to ensure its mission stays in tact as the company grows.

These corporate entity forms may not be appropriate for every company, and there are many complex considerations to take into account when selecting the appropriate entity form. As such, it is recommended that the founders or directors of a company consult an attorney to assist in making the best decision for the company.

Disclaimer. The contents of this article are not legal advice, and are provided only for informational purposes. This article provides only a general discussion, and does not include all relevant information regarding the topics and issues addressed within it.

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