Indiana Benefit Corporations

In recent years, consumers and investors have demonstrated an increased preference for socially conscious companies. The natural outgrowth of this trend has been the rise of socially conscious companies like Tom’s, a shoe company that donates one pair of shoes to those in need for each pair it sells. On January 1, 2016, Indiana entered the fray as the 30th state to enact a benefit corporation statute. Benefit corporations are for-profit corporations formed with the additional purpose of providing a general public benefit. Under the statute, a general public benefit is a benefit creating “material positive impact on society and the environment,” as a whole, through a corporation’s operations.[1] This ambiguous language provides flexibility to benefit corporations that have a variety of benefit interests.

Benefit corporations can narrowly tailor their benefit purpose by identifying one or more specific public benefits in its Articles of Incorporation. Specific public benefits include: (1) “providing low income or underserved individuals or communities with beneficial products or services;” (2) “improving human health;” or (3) “conferring any other particular benefit on society or the environment.”[2]Explicitly stating specific public benefits can provide shareholders and directors with a roadmap of what a benefit corporation hopes to achieve through its operation.

Ultimately, a specific public benefit can spark the interest of a new class of investors who want to benefit society while still having an opportunity for a return on their investment. Patagonia, an outdoor clothing company, is one example of a benefit corporation.[3] It lists several specific public benefit purposes in its annual report, including: donating 1% of annual net revenue to organizations that promote environmental conservation and sustainability, reducing its environmental footprint, and providing on-site daycare and extended paid time off so employees can do volunteer work.

Benefit purposes can be either general or specific, and they add to the affirmative duties that a director already owes to the corporation. Acting in the best interest of the corporation now requires taking into consideration how decisions will affect shareholders, employees, society, the environment, and customers as beneficiaries of the corporation’s public benefit purposes.

One critical difference between Indiana Benefit Corporation and traditional for-profits is the ability of directors to focus on social and environmental impacts without the fear of litigation or shareholder reprisal. Indiana allows traditional for-profits to consider other factors, including social impact in determining the company’s best interests. However, for-profit directors are still at risk of shareholder lawsuits when shareholders believe they have given too much weight to these non-profit considerations.

It is unclear how common the Indiana Benefit Corporation will become, but at minimum, it provides a hybrid business entity bridging the gap between a traditional for-profit entity and non-profits.

 


[1] IC 23-1.3-2-7
[2] IC 23-1.3-2-10
[3] Note that Patagonia is not incorporated in Indiana.

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