Articles

Robert Kanuit

New Type of Corporation Gives Entrepreneurs Options

Until now, socially-minded startup entrepreneurs had two choices for their new company: (1) a for-profit corporation or LLC; or (2) a non-profit corporation.

Unfortunately, neither choice is ideal if the entrepreneur expects some return on investment, but wants the new company to also provide a social benefit. Non-profit corporations cannot provide a return on investment to their members.

A new law, the Minnesota Public Benefit Corporation Act, gives startup entrepreneurs and existing companies a new option – the Public Benefit Corporation or “PBC.” A PBC is a hybrid of the traditional for-profit and non-profit corporations. Like a non-profit corporation, a PBC can pursue a social benefit. Like a for-profit corporation, a PBC can provide a return on investment to its owners and raise capital. In many ways, a PBC is the best of both worlds.

A PBC is not a BCorp. BCorp is a certification issued by the non-profit company, B Lab. It is similar to the Underwriters Laboratories certification given to products. B Lab claims that the BCorp certification is only given to companies who meet rigorous standards of social and environmental performance, accountability, and transparency. B Lab sets a standard and then evaluates companies based on that standard. However, a BCorp is not a different kind of corporation. It is simply a regular corporation that has attained the BCorp certification from B Lab.

Why are PBC’s even necessary? Aren’t for-profit companies in Minnesota allowed to operate in a socially responsible manner? In Minnesota, a special law known as the Multiple Constituency Statute allows for-profit corporations to consider the interests of other persons, groups, and the environment, not just the interests of shareholders, in making corporate decisions. However, the Multiple Constituency Statute only allows for-profit corporations to consider other interests, it does not require for-profit corporations to do so. Indeed, courts have decided that even under the Multiple Constituency Statute, the interests of shareholders are the most important, and have priority over the interests of others.

Under the new PBC law, corporations are required to take social interests into account in making corporate decisions, along with the interests of shareholders. In addition, the law specifically states that the interests of shareholders may not be given priority over social benefits under any circumstances. This is the main thrust of the new law.

Why is this important? Can’t a socially-responsible for-profit corporation just discipline itself to consider social benefits in making its decisions? Especially with startups, attracting talented employees and raising capital are priorities. This is also true to a lesser extent with existing companies. To many prospective employees and investors, the company’s commitment to pursue a social benefit social is very important, maybe even the most important factor in deciding whether to work for or invest in the new company.

Companies that are not PBCs are free to market themselves to prospective employees and investors as socially-minded, yet are under no legal obligation to follow through on that claim.

Under the new law, a company must follow through on such claims, which is a comfort to socially-minded prospective employees and investors, and also aides the company in attracting and retaining such employees and investors.

What is wrong with just forming a traditional non-profit corporation? Nothing, except in a non-profit corporation, the entrepreneur, who may have valuable intellectual property that he invented and owns, gives up control of the company to a board of directors and is not allowed any return on his work or investment. Younger entrepreneurs, particularly, may need this income to support themselves or their family. In addition, since a non-profit cannot provide a return on investment to its members, it cannot raise needed capital through investors to expand.

How do you form one of these PBCs? There are three ways:

  1. Form a new corporation and make a public benefit election;
  2. Convert an existing corporation or LLC to a PBC; or
  3. As a part of a merger if the surviving corporation is a PBC.

Forming a new PBC is as simple as filing articles of incorporation with the Minnesota Secretary of State that contain a special election to be a PBC.

Converting to a PBC or merging with another corporation to form a PBC requires a two-thirds majority vote of all of the shareholders of all involved corporations. The two-thirds requirement includes all shareholders, even non-voting shares. Furthermore, the terms of any shareholder agreements are disregarded in determining the two-thirds vote requirement.

If the two-thirds vote requirement is met, any shareholders who did not vote in favor of the conversion or merger have what are known as dissenters’ rights, which are rights to demand that the corporation buy back their shares at fair market value. Fair market value is not defined in the statute, but would probably be determined by appraisal of the company.

An existing non-profit corporation cannot convert to a PBC. Allowing such conversions would create severe tax problems for the non-profit corporation.

An existing LLC can convert to a PBC. However, there is no such thing as a “public benefit LLC” under the new law, so the resulting entity will be a corporation, not an LLC. This may have tax ramifications for the LLC owners.

There are three types of PBCs: A general benefit corporation, a specific benefit corporation, and a general benefit corporation with a specific purpose. A general benefit corporation must operate its entire business in a manner that conforms to its stated public benefit. A specific benefit corporation allows an entrepreneur to focus on a specific purpose without being required to operate the entire business to further that purpose. A general benefit corporation with a specific purpose is a combination of the two, intended for very large and complex institutions.

There are state reporting requirements for all PBCs. The reporting requirements for a general benefit corporation are far more complicated than the reporting requirements for a specific benefit corporation.

Specific benefit corporation reporting requirements – to maintain its PBC status, a specific benefit corporation must file an annual report with the Minnesota Secretary of State. There is no form for this report. The report must describe:

  • That ways in which the corporation pursued and created the specific benefit.
  • The extent to which the specific benefit was created and pursued.
  • Any circumstances that hindered the corporation’s efforts to pursue or create the benefit.

Filed reports will be available for public viewing on the Secretary of State’s website. Failure to file the report results in the loss of PBC status.

General benefit corporation reporting requirements – these are much more complicated. Recall the discussion of B-Corps and B-Lab. A general benefit corporation must choose what is known as a third-party standard to measure its efforts against when reporting to the state. B-Lab is the most famous such third party, but there are others, and there probably will be many more as PBCs become more popular.

On a yearly basis, a general benefit corporation has to file an exhaustive report measuring its efforts against the chosen third-party standard. This report will also be available to the public on the Minnesota Secretary of State’s website, where anyone interested can view and assess the report’s merits.

Public comment is the intended enforcement mechanism. Anyone can view the report online free of charge. The idea is that the resulting public discourse about the contents of the report will force PBCs to be honest in assessing their performance. Failure to do so could result in embarrassment, bad publicity, and lost business.

The Minnesota Secretary of State has no plans to conduct any independent review of the content of any report filed. The Secretary of State’s only duties are to accept reports for filing, display filed reports on its website, and revoke the PBC status of any PBCs that fail to timely file their annual reports.

At this time, 26 other states allow public benefit corporations. Wisconsin is not one of them. Legislation has been proposed in Wisconsin several times to allow PBCs, but has not been passed. It is uncertain when or if PBCs will be allowed in Wisconsin. It is also uncertain how PBCs from other states, like Minnesota, will be treated if they also have operations or do business in Wisconsin. Presumably, PBCs will be treated just like regular corporations in Wisconsin, which could pose problems from a corporate decision making standpoint.

The new Minnesota PBC law is very complex and contains many requirements and details not discussed in this article. This article is only a summary of the law’s most important provisions. Please seek advice from a qualified business attorney if you have questions about the law and its requirements.

Robert R. Kanuit is an attorney at Fryberger, Buchanan, Smith & Frederick, P.A., practicing since 1994 in the areas of real estate law, business law, and wills and trusts. You can reach him at the firm’s Duluth office at (218) 725-6836.