Indiana Benefit Corporations: The What, How and Whether of Forming a B-Corp.
The Rise of B-Corps
The past few years have seen increasing interest in the formation of a new corporate form, the benefit corporation. A benefit corporation, a “B-Corp” as often called, is a form of business for companies whose mission is to do good, that is, to provide some public benefit. A benefit corporation is not a non-profit organization. Rather, it is a for profit corporation that generates a public benefit.
Indiana, like over 30 other states, has enacted legislation to permit the formation of benefit corporations. In Indiana, a benefit corporation is one that has a general public benefit as part of its purpose. A general public benefit is defined as a “material positive impact on society and the environment, taken as a whole assessed against a third party standard, from the business and operations of a benefit corporation.” Ind. Code §23-1.3-2-7. A company can also choose one or more specific public benefits on which it is focused. At the time of this article, ten corporations have active status as benefit corporations in Indiana.
You may be wondering why a corporation would need to be a benefit corporation in order to “do good.” Well, it has long been a staple of our country’s business law that a corporation’s primary duty is to its shareholders, or what has been termed “shareholder primacy.” In other words, a corporation’s primary goal is to maximize the money that ultimately goes to its shareholders. In fact, historically, shareholders could have standing to bring suit to enforce this.
But a growing movement of entrepreneurs, investors, customers, and employees are demanding that corporations consider the greater public, social, and environmental effects of their business practices, not just the business’s impact on shareholder earnings. Thus, the rise of the benefit corporation.
How to Form a B-Corp in Indiana: The Basics
Here are the initial steps you need to take and initial factors you should consider when forming a benefit corporation in Indiana:
- File articles of incorporation with the Indiana Secretary of State. You can do this online at INBIZ.gov, start a new business, and select “Domestic Benefit Corporation.”
- Your articles of incorporation must include a statement that your company is organized for the purpose of conducting business as a benefit corporation under the Indiana Code. (Note, you do need to be organizing as a for-profit corporation, not some other entity type, such as a limited liability company or non-profit.)
- Draft by-laws for your company in compliance with the Indiana Code.
- Obtain an EIN number from the IRS.
- Determine how your corporation will be taxed. Benefit corporations are subject to federal taxation in the same manner as ordinary domestic corporations. Many small (“closely held”) corporations elect to be taxed as an “S-corporation.” You should consult with your tax advisor to determine what form is right for your company.
Indiana’s benefit corporation law does not require that a company be “certified” by a third-party, but third party entities provide standards against which benefit corporations can benchmark their own practices on a regular basis, annually in Indiana.
One of the most prominent of these standards entities is B Lab, a Pennsylvania non-profit that has been driving the development of model laws and the interest in benefit corporations. B Lab evaluates companies on such factors as governance transparency, worker compensation and ownership, community products and services, use of local suppliers, civic engagement, and environmental inputs and outputs.
In addition to considering the above factors regarding initial set-up, you should consider the additional steps that will be required in order to operate as a benefit corporation in Indiana:
- Name a person to be benefit director/officer of your company. He or she is responsible for producing the annual report on benefits.
- Identify a third-party standard against which your company will measure its progress.
- Produce an annual report on the general and/or specific public benefits that your company has had, and distribute the report to your shareholders. The Indiana Code has specific requirements regarding the factors and content of the report and its filing.
- Consult with your tax advisor regarding business expenses that you may be able to deduct as a benefit corporation that would not otherwise be deductible by an ordinary domestic corporation.
- Consider whether to pursue a Certified B Corps certification from a third-party. It is not required to be certified by a third-party standard in order to organized as a benefit corporation under Indiana law.
It is important to remember that other than the public benefit purpose and the specific requirements outlined in the Indiana Code, a benefit corporation is just another business. It must follow the laws set out in Indiana law for other corporations, and continue to observe the corporate formalities that all businesses must observe in order to protect the shareholders, officers and directors from personal liability.
Converting Your Existing Company to a B-Corp
If you are already operating a company as some other for-profit type of entity, you may be able to become an Indiana B-corp by converting to a B-corp. This may be done by filing Articles of Conversion with the Indiana Secretary of State. The availability of this option will depend upon what type of entity your business currently is. The conversion will also need to be approved in the manner appropriate for your particular entity. To review the rules for conversion of a business entity to another type of entity, you may want to start by reviewing Ind. Code §23-0.6 et. seq. (the “Uniform Business Organization Transactions Act”).
If conversion is possible for your entity, it is important for you to assess many internal factors before taking the next step, such as:
- What tax consequences, if any, will there be to converting?
- What approvals, if any, does your current entity require by reason of its articles, bylaws, or other organizational governing documents in order to convert?
- Could the conversion result in one or more shareholders being personally liable for debts or obligations of the current entity?
- Will a conversion impact the terms of any existing agreement (e.g. contracts, leases, financing, loans)?
The above are just some of the factors that need to be considered. Your entity may have additional or different factors that are unique to it. Prior to finalizing your plan, it is advisable to meet with both your certified public accountant and your attorney to discuss the possibility of converting your existing company to a B-corporation.
Whether B-Corp is Right for Your Business
Only time will tell whether the public benefit corporate form will result in increased attractiveness to investors and customers. Some have argued that the benefit corporation form is unnecessary. Others have said that it is impossible for a company to have a “material positive impact” on society and the environment when a company, by its very nature of operating, will inevitably have negative impacts such as laying off employees, or procuring or using resources that have a negative impact on the environment or the public as a whole.
Additionally, benefit corporations laws have been criticized as not having true accountability. For example, under Indiana law, the potential beneficiaries of a benefit corporation cannot hold the benefit corporation liable if the beneficiaries receive little or no benefit at all. And even though shareholders may theoretically file suit to hold the benefit corporation accountable to its public benefit purpose, no monetary damages may be obtained.
So, is there enough benefit to being a benefit corporation to warrant going through the process? When answering this question for your company, you may want to ask yourself these questions:
- Will being a benefit corporation help me attract and retain more customers, and employees?
- Is my company more attractive to current and prospective investors and lenders as a benefit corporation?
- Are the owners and managers more comfortable and perhaps then more effective managing a company focused on public good and profitable growth, rather than profitable growth alone?
As with all legal entities, B-corps are shaped by laws, both statutory laws and case law. Benefit corporations are new creatures and the natural processes of legislation and case law require time to develop.
One thing is clear however: Numerous articles (e.g. one here) and studies indicate that the rising generation of American workers and entrepreneurs are demanding greater corporate responsibility. For companies seeking to grow in a way that attracts this new generation of customers, employees, and investors, it may be worthwhile exploring the benefits of organizing as a benefit corporation.
Additional Reading: "Benefit Corporations" Reflect New Vision of What Businesses Can Be, published in Limestone Post, August 21, 2018.