New York Approves Benefit Corporations: A Message for Nonprofits?

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December 14, 2011; Source: MetroFocus  | New York State is now the seventh state that officially recognizes “benefit corporations,” one of the increasingly popular “hybrid” alternatives to nonprofits and for-profits. A benefit corporation makes profits like a typical corporation, but is permitted to pursue socially minded activities that do less than maximize profits. In other words, the mission of a benefit corporation is both profits and societal improvement.

Actually, the benefit corporation designation gives shareholders the right to sue for inadequate societal benefit. For example, if a benefit corporation establishes a specific societal benefit goal, such as environmental protection, and then, under the leadership of the CEO, does not sufficiently pursue that goal, shareholders can sue, or the benefit corporation designation can be revoked.

So what? Don’t most corporations issue social responsibility reports that read or sound like the reports required of benefit corporations? Don’t we always read the promotional materials of corporate trade associations, such as those of the U.S. Chamber of Commerce and the National Association of Manufacturers, that describe corporate activity and the free (or free-ish) market as in and of themselves good for society and likely to lead to positive outcomes for workers and communities?

The benefit corporation is a partial assault on that image of capitalism in the sense that a typical for-profit corporation that chooses to make profits while undermining the environment is doing what a profitable corporation can do without approbation. But what does it say about nonprofits? Are the states that are authorizing benefit corporations and L3Cs (low-profit limited liability corporations) making some sort of statement about nonprofits? Should nonprofits be concerned that the increasing popularity of hybrids implies questions and concerns that government entities have about the utility of nonprofits?—Rick Cohen

  • Gary Schuster

    I don’t see why B Corps are a criticism of non-profits. I see no criticism that nonprofits are not doing their job. B Corps are a criticism of traditional free-market capitalist corporations. B Corps nudge standard corporations toward greater social responsibility. I think B Corps will become a major new source of support for nonprofits, much like private foundations. I think B Corps will allow nonprofits to do more, and better.

  • Ian Garrett

    I wouldn’t say it’s as specifically a criticism of Non-profits, there are many that excel under that structure. I’m an excited fan of B-corp and L3C options because there are a lot of companies that fit somewhere between the S/C (typical) corporate model and the non-profit 501c3 model. Be it anything from companies that respond to market needs and would otherwise be a standard corporation with a social statement or a non-profit of a size that doesn’t warrant the administrative burden of the full 501c3 designation to do what they do because they aren’t pulling in large donations or don’t need to. Many arts companies are turning to LLC as an option to run their arts companies without a board or the administrative burden in exchange for paying taxes. And so this new designation addresses the social benefit without going all the way down the non-profit route.

    Hopefully that will also help to alleviate some of the 501c3 fatigue that many foundations have been expressing regarding the continued explosion of small non-profits.

    But another hope I have is education on the tax deductions associated with these types of businesses. While you can currently deduct donations to non-profits, there is a lot of concern about the future of that process and possible caps. But really, aside from the tax-deduction, a donation is an investment you never expect to see a return on. And you can deduct loses on Investments to the same extent. It’s less predictable the level you can deduct, because you expect monetary returns, but one of the big benefits of these new structures would be to change donation into investment. (here is an article from Consumerist on Wednesday with how:

    So, if we were to change the discussion around “development” for “fundraising” and seeking donations in the arts to “capitalizing” “investment” in the “arts economy” you would bring the arts more directly in relationship to the market economy, quell fear over donation deduction caps and, with proper education, not see any change in tax-benefits for the donor/investors. Hypothetically of course…

  • Tim

    It might be better not to use the catchy phrase “B Corp”, since New York State already has “Type B”7 (and A, C and D) not-for-profit corporations.