Benefit Corporations and Small Businesses: Part II

Part I of this series briefly discussed Indiana’s new benefit corporation statute as well as certification of a company as a “B Corp” by B Lab and some of the possible advantages of certification and of incorporation under the new statute.  Part II begins to look more closely at the details of the new law and to consider whether it makes sense for small businesses to incorporate under the new statute.

From a corporate law perspective, benefit corporations are, first and foremost, corporations subject to the Indiana Business Corporation Law, just like any other Indiana for-profit corporation.  In our view, a corporation is not the best choice of the form of entity for most small businesses.  For a number of reasons, including the tax alternatives available to LLCs, the “pick-your-partner” and charging order provisions of the Indiana LLC statute, and the fact that LLCs have fewer corporate formalities that must be observed (which decreases the possibility that the liability shield that protects the assets of owners from the creditors of the business will be disregarded through so-called veil-piercing), we believe that a limited liability company is a better choice than a corporation for most small businesses.

The above advantages of LLCs over corporations are the same – or even greater – for benefit corporations.  For example, partnership taxation is not an option for benefit corporations; if that is important enough, a benefit corporation is not a viable alternative.  In addition, the benefit corporation adds more required corporate formalities on top of those already imposed by the Indiana Business Corporation law, increasing the administrative burden and the possibility of weakening the liability shield protecting the assets of owners from the company’s creditors.  In other words, for most small businesses, a benefit corporation will not be the best choice of entity for most small businesses, unless the advantages of incorporating as a benefit corporation outweigh the advantages of organizing as a limited liability company.

As we discussed in Part I, the advantages of a benefit corporation appear to fall into two categories:

  • The business advantages that may be achieved by demonstrating to customers and investors the company’s commitment to social and environmental responsibility and to creating specific social benefits.
  • Protecting the directors from lawsuits based on allegations of breach of fiduciary duties for basing decisions on social benefits instead of maximizing corporate profits.

As for the first category, we note that being a benefit corporation can help demonstrate a commitment to creating benefits to society but a benefit corporation probably has no more ability to produce those benefits than a regular business corporation or a limited liability company. For example, the Indiana Business Corporation Law already permits directors to take into account the impact of their decisions on constituencies other than their shareholders and concerns other than maximizing profit, and the Indiana Business Flexibility Act permits the organization of LLCs for any business, personal, or non-profit purpose, which seems broad enough to cover anything that might be accomplished by a benefit corporation. We will discuss that topic in more detail in Part III of this series.  The degree to which directors of a benefit corporation are exposed to lawsuits by shareholders for pursuing purposes other than the pecuniary interests of shareholders will be addressed briefly in Part III and more thoroughly by a guest blogger in Part IV.