Insights

Colorado Public Benefit Corporations: Q&A

February 2, 2015

By: Ryan M. Tharp

Colorado’s benefit corporation statute became effective on April 1, 2014, allowing socially conscious entrepreneurs another entity option when starting a business. If you are interested in a Colorado public benefit corporation, contact an attorney at Fairfield and Woods, P.C., and we can help you decide which entity type is right for you.

What is a Colorado public benefit corporation?

A Colorado public benefit corporation is a for profit corporation that requires the company be operated in a manner that is sustainable and beneficial to society and the environment. As compared to a regular Colorado corporation, a Colorado public benefit corporation has these key differences:

• The articles of incorporation must list one or more public benefits which the company must strive to achieve.
• The company must be managed to balance (1) the pecuniary interest of the shareholders, (2) the best interests of those affected by the company’s conduct, and (3) the public benefits listed in the articles of incorporation.
• The company must prepare an annual benefit report with (1) a description of how the company promoted the public benefits listed in the company’s articles of incorporation and any obstacles the company faced in promoting those public benefits and (2) an assessment of the overall social and environmental performance of the company against a third-party standard.

What types of things can be “public benefits”?

The definition is of “public benefit” is very broad. The Public Benefit Corporation Act of Colorado defines “public benefit” as “one or more positive effects or reduction of negative effects on one or more categories of persons, entities, communities, or interests other than shareholders in their capacities as shareholders, including effects of an artistic, charitable, cultural, economic, educational, literary, medical, religious, scientific, or technological nature.”

How is the management of a Colorado public benefit corporation different than the management of a regular Colorado corporation?

Colorado law requires that the business and affairs of all for profit corporations be managed by the corporation’s board of directors.

A regular Colorado corporation must be managed in the company’s best interests. While there is some debate about what constitutes the company’s best interests, many believe this means that directors must manage a regular Colorado corporation in a manner that maximizes corporate profits and stock price, without giving consideration to other interests.[1] Others believe that the “best interests of the company” is broader than solely the maximization of profits and share price, instead arguing that directors can (but are not required to) consider certain other interests, provided those interests align with the best interests of the company.

In contrast, the directors of a Colorado public benefit corporation must consider and balance three different interests: (1) the pecuniary interest of the shareholder, (2) the best interests of those affected by the company’s conduct, and (3) the public benefits listed in the articles of incorporation. This is a major change from a regular corporation, where directors are required to only consider the best interests of the company – which many believe is limited to the maximization of profits and stock price.

What is a benefit report?

The idea behind an annual benefit report is that the company can be more effective in promoting its public benefits and sustainability.

Every Colorado public benefit corporation must annually prepare a written report with (1) a description of how the company promoted the public benefits listed in the company’s articles of incorporation and any obstacles the company faced in promoting those public benefits and (2) an assessment of the overall social and environmental performance of the company against a third-party standard. The company is required to submit the report to every shareholder and to post the report on the company’s website. If the company does not have a website, the report must be made available to the public upon request.

Benefit reports have been criticized as being redundant, expensive and time consuming, and of little value to the public.

• Benefit Reports Can Be Redundant.  Most public benefit corporations are likely to be small companies with a few shareholders and where the shareholders are active in the management of the company (this is known as a “close corporation”). The shareholders in a close corporation likely know what is going on with the company – they wouldn’t need a report to keep them informed. If there are shareholders who are less active in the company’s management, such shareholders could simply contact the other shareholders who do manage the company to get any desired information.
• Benefit Reports Can Be Expensive and Time Consuming.  Small companies often do not have the time or resources to annually create a benefit report – rather, such companies are busy running a business and creating public benefits. Every minute spent drafting a benefit report is a minute that cannot be spent on the company’s business (or spent enjoying Colorado).
• Benefit Reports Can Be of Little Value to the Public.  The selection of a third party standard is a choice left to the company. The only requirement is that the company not participate in the creation of the standard and the standard must define the criteria and the weightings of those criteria in measuring the company’s performance. Beyond those requirements, the company can select any standard it desires, or switch the standard every year. Interested members of the public will have difficulty comparing different company’s benefit reports because it is likely the reports will use different standards, which could make the reports to be of little value to the public. It is also possible that directors of public benefit corporations will select the standard by which their company performs the best – again making the reports of little value to the public.

Are there any risks involved in a Colorado public benefit corporation? If I don’t consider one of the required interests, can someone sue me?

Colorado law specifically protects directors of public benefit corporations from law suits by people who are interested in the public benefits listed in the articles of incorporation, and by people affected by the corporation’s conduct.

However, this does not mean that public benefit corporations are risk free. In regular corporations, creditors of a company may “pierce the corporate veil” and hold shareholders of the company liable for corporate debts in certain limited situations. One such situation is the failure to follow corporate formalities, i.e., the failure to do the things required for corporations under Colorado law. Since benefit reports are required for Colorado public benefit corporations, the failure to annually prepare and distribute the benefit reports may constitute a failure to follow corporate formalities and could result in liability for the shareholders. Since Colorado public benefit corporations are so new, and are not particularly common at this point, there have been few cases in Colorado courts dealing with these and other issues.

What’s the difference between a Colorado public benefit corporation and a Certified B Corporation?

A Colorado public benefit corporation and a Certified B Corporation are not the same thing. A Colorado public benefit corporation is a legal entity organized under Colorado law. A Certified B Corporation (often referred to as a “B Corp”) is a special designation that was created by a non-profit organization called B Lab. Any company that meets B Lab’s requirements can apply for and become a Certified B Corporation. A Colorado public benefit corporation is eligible to become a Certified B Corporation by meeting B Lab’s requirements.

Are there other entity options besides Colorado public benefit corporations for socially conscious entrepreneurs?

Colorado public benefit corporations are not the only entity options for socially conscious entrepreneurs. Colorado public benefit corporations may be a good choice for some types of endeavors, but there are also other viable options, some of which may be a better choice.

• Limited Liability Companies (“LLCs”).  Limited liability companies do not have many statutory obligations. They were created with the principal of “freedom of contract” in mind. The owners of a limited liability company can agree to operate the company in any way they desire, including by requiring the managers of the company to manage the company as if it were a Colorado public benefit corporation. The owners could accomplish this by signing a written operating agreement setting forth the obligations of the managers. One major advantage to a limited liability company is that the owners could agree that the company is not required to annually produce a benefit report – that way, the company could have the benefits of a public benefit corporation without the time consuming obligation to produce a benefit report.
• Regular Corporations.  Regular corporations are the traditional choices for businesses, but the directors of a regular corporation may not be able to consider the full range of interests that directors of public benefit corporations are required to consider. Nonetheless, there are many ways to promote public benefits in a regular corporation.
• Non-Profit Corporations.  For certain undertakings, a non-profit corporation may be the appropriate choice, but if your goal is to make money and promote public benefits, a non-profit corporation is probably not the appropriate choice.