Over the past several years, entrepreneurs and businesses have shifted focus toward business structures that consider overall impact alongside profits by flocking to benefit corporations. As the name suggests, however, benefit corporations are just that, corporations. Although corporations are the ideal vehicle for high-scale and emerging businesses that anticipate raising capital from investors to fund its operations, it is not the appropriate entity for every business. In fact, for those with predictable cash flow and a desire for management flexibility and pass-through taxation, the more appropriate entity is often an LLC. Does structuring your business as an LLC mean you forgo the ability to be a “benefit company”? The short answer is no.
In fact, as of this date, six states have adopted some sort of benefit LLC model. Even in jurisdictions that do not have a “benefit LLC” statute, entrepreneurs may replicate the statutory requirements by embedding those same governance standards and reporting obligations within their governing documents. Because LLCs are creatures of contract (i.e., hence the flexibility), some have been cynical of the benefit LLC statutes in some jurisdictions. Luckily, organizations focused on furthering purposeful business models have provided free legal toolkits to help entrepreneurs include provisions in their governing documents to combat shareholder primacy. Moreover, private organizations that provide certifications as to compliance with third-party environmental, sustainability, and governance (ESG) standards, such as B Lab (through the popular B Corp certification), give applicants assessment points when they are organized or incorporated as a statutory benefit company or, if not available under the law of their relevant jurisdiction, include such standards in their governing documents.*
Practically, businesses organized as benefit LLCs, whether as statutory benefit LLCs or LLCs with benefit standards embedded in their governing documents (e.g., Articles of Organization and Operating Agreement), implement heightened fiduciary obligations on their governing bodies (e.g., Managers or Members) by requiring those governing bodies to consider the effect their decisions have on the various stakeholders impacted by their business (e.g., employees, customers, creditors, the environment, or society at large). Additionally, the governing documents may also require the company to periodically report whether it is has achieved its stated public benefit goals and even host such reports on their website.
Additionally, benefit LLCs also have the traditional benefits of the LLC model, such as pass-through taxation, which allows for the pass-through of profits, losses, credits, and deductions to the individual Members of the LLC (i.e., the LLC itself does not pay federal income taxes). Moreover, similar to their corporate counterparts, benefit LLCs can implement employee equity and ownership structures that incentivize long-term growth and stewardship. For instance, a common employee equity incentive mechanism in the world of LLCs is that granting of profit interests, which allow the awardee to receive distributions on the profits created in excess of the value of the company on the grant date.
Entrepreneurs that prefer the organizational framework provided by the LLC structure do not need to forego implementing ESG standards or otherwise convert to a corporation to bind themselves to socially responsible business practices. To the contrary, the benefit LLC model provides a familiarity and flexibility without precluding the adoption of socially responsible standards.
* The Mission Lock Question on the B Corporation Impact Assessment asks: “As an independent or publicly-owned business, [have you] amended corporate governing documents or adopted a legal entity that requires consideration of all stakeholders in its decision-making (e.g. benefit corporation, completed B Corp legal amendment).”
About Shayn Fernandez
Shayn is the corporate lead at Rockridge Venture Law®, offering seed-to-scale-to-sale corporate counsel to entrepreneurs, emerging companies, and investors in all stages of a corporate lifecycle–from formation and fundraising to exits through M&A or IPO. Shayn’s practice areas include corporate law, finance and fundraising, securities, and mergers and acquisitions. Read more about Shayn, connect with him, and Calendly him.
RVL® recommended reading by Shayn:
Rockridge Venture Law® was launched in 2017 to become the preeminent intellectual property and technology firm across the Appalachian Innovation Corridor. We now have offices in Chattanooga, Durham, and Nashville, and represent clients and interests globally. Our services include all aspects of intellectual property, litigation, M&A, privacy, technology transactions, and ventures.
We’re proud to be a Real Leaders Top 150 Impact Company and B Corp Best for the World for our commitment to triple bottom line business practices. Rockridge® is also certified by 1% for the Planet for its nonprofit partnerships advancing stewardship and sustainability. RVL’s nonprofit partners in 2020 include Green|Spaces, Living Lands and Waters, Mustard Seed Ranch, and the NC State Lulu Games Social and Environmental Impact Competition. We value transparency and proudly publish our yearly impact reports.
Our pioneering environmental and social impact programs attract top-notch legal talent and assure our clients of missional alignment with their corporate values. Rockridge uniquely addresses two modern profit drivers: innovation (uptake and development), and corporate social responsibility. We’re Building Today’s Company for Tomorrow’s Economy® by leading clients through the dizzying array of information controls, by helping them to develop and monetize proprietary assets, and by enabling their impactful products, programs, and principles.
Learn about global impact and innovation leaders at Rockridge I-Suite®.
See case studies on how we’ve helped transformative companies at Rockridge Case Studies.