The CPA’s role in forming benefit corporations

Social benefit enterprises — those that expand the corporate purpose from creating value solely for shareholders to explicitly creating value for all stakeholders, including employees, customers, the community, and the local and global environment — have become increasingly common in recent years.

The concept is aimed at providing a structure for socially and environmentally conscious businesses and investors. It broadens the for-profit motive to hold the business accountable to people, planet, and profits.

These for-profit entities have all the accounting, auditing, and tax service needs of a typical for-profit entity. But they require special services specific to the business format. As a result, CPAs are positioned to help clients choose the best format available to meet their social impact aspirations, build measurable goals and objectives, and compile financial and nonfinancial data specific for those metrics.

DISCERNING WHETHER A BENEFIT ENTITY IS APPROPRIATE

The Model Benefit Corporation Legislation (MBCL) was drafted on behalf of B Lab, a not-for-profit entity that promotes this legal structure and provides a private certification. According to Frederick Alexander, head of legal policy at B Lab, at least 5,000 businesses have selected the benefit company form. Benefit legislation is available in 33 states plus the District of Columbia and Puerto Rico, and proposals are under consideration in at least five more states. Beyond the United States, Italy has adopted benefit corporation legislation. Each jurisdiction’s approach varies, but the new form generally contains three requirements:

Expanded purpose

Benefit corporations must have a purpose to create a material positive impact on society and the environment under the MBCL.

Directors in traditional corporations have some flexibility to take actions to benefit other stakeholders but, in general, must ultimately link such actions to generating long-term value for shareholders. And, depending on the state, directors may have a duty to sell to the highest bidder when the corporation is sold, regardless of the interests of other stakeholders or the desire to preserve corporate culture.

Socially conscious investors and directors, however, may want the legal protection to consider all stakeholders in day-to-day decision-making. Some may want to legally protect the company’s mission in the event of a sale. Or they may not necessarily want to sell to the highest bidder. The benefit corporation structure addresses these concerns.

Accountability

Benefit corporation directors must consider the effects of any action (or inaction) upon stakeholders and the environment, not just the shareholders. Under the MBCL, each publicly traded benefit corporation must name a benefit director who annually provides an opinion as to whether the benefit corporation acted in accordance with its general public benefit purpose.

Transparency

The MBCL requires benefit corporations to report annually the social and environmental performance of the company against a comprehensive, credible, independent, and transparent third-party standard to ensure that the business is creating a public benefit. If the company has adopted specific benefit purposes, it must report the extent to which the specific public benefits were created.

In some states, the company must declare specific public benefits. These specific benefits are defined by the company. Examples from Delaware benefit corporations include helping to improve public health and prevent disease, financing clean-energy technologies in underserved communities, and developing affordable drinking-water treatment technologies.

STEPS TOWARD SETTING UP A BENEFIT CORPORATION

Once the client has decided to move ahead with setting up a benefit corporation, several steps must be considered:

Step 1: Seek counsel for the client

The client should have counsel who is proficient in business law and has knowledge of the entity forms in the state where the organization will incorporate. And some challenges may arise, as scant case law provides little guidance on how laws surrounding this relatively new form will be interpreted. The CPA will want legal counsel to assist the client in weighing the advantages and disadvantages of the benefit form as compared to other entities to ensure that this is the client’s preferred choice.

For a new benefit corporation, the CPA should find out where the company plans to conduct its principal business activities. That may be the most efficient place to incorporate. For an existing company planning to convert, the CPA should find out in which state the company is currently incorporated, as this may be the preferred choice. Depending on the client’s wishes, the CPA may assist in interviewing and negotiating the terms of the legal counsel’s engagement. Both professionals should clarify who will perform which responsibilities, such as filing tax elections.

Step 2: Consider tax consequences

A benefit corporation is subject to the same tax treatment as traditional corporations for federal tax purposes. If other tax treatment is desired, the tax and legal advisers can explore other options.

An existing business may want to consider converting to the benefit corporation form. It is vital that the client obtain professional tax advice before taking any steps to convert. The tax adviser will need to be involved early in the process.

Step 3: Consult with due diligence

Counsel should check for legal requirements or limitations. Some states prohibit banks and insurance companies from becoming benefit corporations. If the business is a professional corporation, the lawyer needs to ensure that a professional firm can incorporate as a benefit entity in the desired forum.

Counsel should perform due diligence by reviewing loan documents, contracts, and other documents to see whether any legal impediments exist or notices are required. CPAs can assist by notifying counsel of any contracts, loans, employee benefit plans, and other agreements that should be checked before organizing or converting.

Step 4: Select state of incorporation

Legal rights and responsibilities will vary by jurisdiction. It is helpful for CPAs and attorneys to be familiar with Delaware’s statute as a point of understanding and comparison to the MBCL adopted with some variations by the majority of states. Delaware has more relaxed standards than the MBCL. For instance, a company may choose to create its own reporting standard, rather than use a third-party standard. The CPA may be involved in designing or selecting the standard.

Once the state is chosen, the CPA, legal counsel, and client should communicate about the specific responsibilities each will take to set up the entity. While the counsel may complete legal procedures, the CPA can play an important role by asking for and documenting a checklist for appropriate parties. Actions to set up a new benefit corporation include preparing and filing articles of incorporation, adopting bylaws, and completing other steps typically involved in setting up a corporation. Other intricacies will vary by state, such as whether a benefit director must be designated, whether the company must select specific public benefit purposes, and whether a designation may or must be included in its name. Optional considerations are whether to form a special board committee or whether to delegate responsibilities to an existing committee.

Existing corporations should consider the number of director and shareholder votes needed to approve a conversion. State law or existing documents may require a supermajority or even a unanimous vote to approve the switch. Shareholders who do not vote in favor of the amendment may have dissenters’ rights, or appraisal rights, which require the corporation to pay fair value for the dissenters’ shares. How the change will be effected, such as by merging, also must be determined. Details must be identified, such as whether stock certificates must be reissued and any name changes that need to be made. The CPA can facilitate this process by following through with the parties to see that everyone is completing the tasks in a timely manner.

Step 5: Advise on governance

CPAs can advise existing benefit corporation clients on a variety of governance and structural matters. Among them:

• Mission sustainability: Establishing mission sustainability — being certain that the governance documents would survive myriad situations — is one of the most important aspects of choosing the benefit form. Because CPAs are usually intimately aware of their client’s business, they are positioned to help management clarify the strategic intent. (See, “Patagonia: A Case Study in Managing a Mission.”)
• Social objectives: Benefit organizations typically are engaged within their industry in social and environmental objectives of importance specifically to the industry. An organization may want to have its governance documents reflect the company’s commitment to such goals and objectives. Under the MBCL, businesses can decide whether or not to select specific public benefits. Delaware, on the other hand, requires that businesses select one or more specific benefits.CPAs can also help benefit entities align their goals and objectives within their supply chain. CPAs can work with management to determine appropriate expectations and reporting requirements from suppliers and identify populations that will benefit from the organization and help establish expected outcomes.
• Financial transparency: Sharing financial details, specifically with employees, is another area benefit entities may want to reflect in governance documents. CPAs can help clients establish the appropriate level and type of reporting.
• Succession: Directors and management change over time, so it is important that governance documents provide for continuity. CPAs, cooperating with appropriate legal counsel, can provide governance documents to assure this continuity.
• Employee matters: CPAs can help clients plan and establish employee stock ownership arrangements, which is among the strategies benefit corporations use to align employees with the company’s goals and objectives.CPAs also can help establish employee compensation objectives, using data to assure that the entity can compete in direct compensation, benefit packages, and corporate initiatives such as wellness programs. Benefit corporations often encourage employees to take active roles in the community. The CPA can make an important contribution by identifying activities the entity will support and determining the means by which data concerning employee partners’ participation will be collected and analyzed.
• Environmental concerns: The MBCL requires the board and officers to consider the effects of any action or inaction upon various stakeholders, including the local and global environment. Among the environmental issues benefit corporations frequently find important are the use of renewable on-site energy production, the control of waste, and their efforts to save on overall energy consumption. The CPA can assist with establishing data collection systems to provide the benchmarks against which to measure. Benefit entities that do well in these areas and have reliable data to prove it likely will be rewarded by investors, employees, and customers that place a high value on these outcomes. Those that miss the mark or provide unreliable data might be punished.

Step 6: Help select standards of measurement

The MBCL requires benefit corporations to assess their overall social and environmental performance against a third-party standard that is comprehensive, credible, independent, and transparent. The corporation picks the standard. Examples includeB Lab’s online B Impact Assessment, Global Reporting Initiative, Green Seal business certification, or ISO 26000.

The MBCL describes the contents to be included in the annual report, including how the corporation pursued the general public benefit (and specific benefits, if any), any circumstances that hindered the creation of the general or specific benefits, the process and rationale for selecting or changing the third-party standard, and the assessment of the overall social and environmental performance against the standard.

An important contrast to the MBCL is Delaware law, which allows a public benefit corporation (PBC) to create an internally generated standard to assess its impact in a biennial report. The directors in a Delaware PBC are required to balance the interests of shareholders with the best interests of the stakeholders materially affected by the PBC, and the PBC’s stated specific public benefit or benefits. The report must include the benefit objectives, standards to measure progress in promoting those objectives, factual information based on the standards, and an assessment of success in meeting the benefit objectives.

Step 7: Collect data

Benefit companies will likely have to collect data that previously have not been captured. While benefit corporations are generally free to choose their reporting metrics, businesses that opt for Certified B Corporation status will have to collect the necessary data to report on the categories specified by B Lab, while benefit corporations are generally free to choose their reporting metrics.

CPAs can help benefit corporation clients determine metrics that are consistent with the company’s mission and values. CPAs also can assist clients by actually collecting data, provided they are not involved in an attestation function that requires independence. They also can consult on system-design issues that allow management to put processes in place to track and collect newly required information.

Step 8: Prepare benefit reports

Most states that have adopted benefit corporation legislation require entities to issue a benefit report. These transparency provisions serve:

• The public through the benefit corporation’s overall social and environmental performance.
• Directors in the assessment as to whether they are meeting their duties.
• Shareholders who are enabled to better exercise their rights.

The Benefit Corporation Reporting Requirements (as required by specific state statutes) note that releasing benefit reports to the public and using a third-party standard as an assessment tool, though not required in all states, are considered best practices.

CPAs could provide assurance services on the benefit reports. AT Section 101, Attest Engagements, specifies that “[t]he practitioner must have reason to believe that the subject matter is capable of evaluation against criteria that are suitable and available to users” (paragraph .23). The criteria could be externally generated (e.g., B Lab requirements) or could be developed by management, as long as the criteria are objective, measurable, complete, and relevant (paragraph .24).

Engagements could be in the form of an examination, which would provide reasonable assurance that the information is free from material misstatement, or of reviews that would provide limited assurance.

About the authors

Sandra S. Benson (sandy.benson@mtsu.edu) is an associate professor of business law at Middle Tennessee State University. Paula B. Thomas (paula.thomas@mtsu.edu) is the Deloitte Foundation Professor of Accounting at Middle Tennessee State University and is a past member of the AICPA board of directors. E. James Burton (jim.burton@mtsu.edu) is a professor of accounting at Middle Tennessee State University.

To comment on this article or to suggest an idea for another article, contact Jack Hagel, a JofA editorial director, at Jack.Hagel@aicpa-cima.com or 919-402-2111.

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