What is a Public Benefit Corporation?
Maryland allows social enterprises to pursue legal designation
on August 28, 2017
Updated on August 4, 2022
The phrase “social enterprise” may bring to mind a high-minded, community-oriented endeavor. Maybe one that serves a common good and uses its profitability to advance such values as empowering workers, supporting independent businesses or improving disenfranchised communities. But there is not a lot of specificity to the term in an official sense.
Until recently, use of the phrase was largely a marketing and brand-building identifier rather than a term that carried any legal significance. With the growth of the social enterprise movement, however, many states have enacted legislation to add some legal impact and clarity.
Public Benefit Purpose and State Law in Maryland
Maryland was the first state to pass such a law in 2010 (followed by New York and Delaware), codifying what had been (and still is) a voluntary membership standard established by the nonprofit B Lab, its “B Corporation” designation. In order to qualify as a certified B corporation, a business (which is not required to be a corporation) must complete an assessment. Once designated, the primary benefit to a member company is being identified as such, similar to a standard like “fair trade.” Under the Maryland statute, a business can register with the state as a benefit corporation, a legal category of business entity.
In order to qualify for this designation, an organization must comply in three primary categories:
- Purpose: A business must intend to create a general public benefit, a “material positive impact on society and the environment.” A company may also state a more specific public benefit. The company must be assessed by an independent third-party standard whether it is creating positive impact.
- Accountability: A benefit corporation must consider any action in light of employees, customers, environment and long-term interests, described as a “triple bottom line” of people, planet and profits. This represents a significant departure from the traditionally mandated fiduciary requirement to maximize shareholder profits.
- Transparency: A benefit corporation must present a yearly report to its shareholders and the public on its performance in meeting social and environmental goals, assessed against a third-party standard. Failure to achieve public benefit goals may give rise to a shareholder lawsuit.
To become a benefit corporation in Maryland, a company must declare itself as such in its corporate charter. An existing corporation may become a benefit corporation by obtaining a two-thirds supermajority vote of its shareholders and amending its articles of incorporation. There is no difference between a for-profit benefit corporation and a traditional corporation for purposes of taxation or other corporate requirements. Maryland remains the only state that also permits benefit LLCs (limited liability companies).
The primary benefit to obtaining this unique legal status lies in its definition of corporate responsibility. Under traditional corporate legal obligations, the chief objective must be to maximize shareholder profits, and a CEO or board of directors may incur liability for placing other considerations above profits alone. Declaring a corporation’s purpose to benefit the greater good permits both directors and shareholders to require performance on social benefit as well as financial standards. Additional benefits in an entity designation pertain to a company’s stance in the marketplace, potentially aligning with customer values and attracting employee talent from a purpose-driven millennial pool.
Becoming a benefit corporation is not the only legal entity option for a social enterprise. Other options to consider include incorporating as a 501(c)(3) nonprofit, a low-profit limited liability company (L3C), a traditional for-profit company, or even a hybrid of nonprofit and for-profit. For more information or assistance on establishing a benefit corporation in Maryland, speak to an attorney who works with social enterprise companies.