So you’ve heard about public benefit corporations (“PBCs”) and you’re wondering how you might go about converting your entity into one. Fortunately for you, it’s not very complicated and this blog post will explain the basics of how to do it.
First we explain two of the main differences between PBCs and other corporate forms (at least in our home state of Colorado), then explain the two most common methods of conversion.
Quick Review: Basic Requirements for a PBC
The first distinguishing feature of a PBC is that it must have a more narrowly defined purpose than other for-profit entities. Most business entities, including LLCs and corporations, are required to have the purpose of the business expressly set forth in the formation documents filed with the Secretary of State (i.e. Articles of Incorporation or Articles of Organization). Most for-profit companies choose something broad and general, such as “to engage in any lawful act or activity for which corporations may be organized under the law of [name of state].”
The purpose statement is important for any company because it defines which activities are “in-bounds” for the company. If a company’s management acts outside of those predetermined boundaries, the shareholders (or members, if an LLC) can bring an action against the directors (or managers) for mismanagement. (Hence why founders typically designate a broad purpose: to give themselves as much room to maneuver as they can.)
A PBC’s official purpose statement, by contrast, must include the specific public benefit or benefits the entity will pursue. In Colorado, a “public benefit” is defined as[1]:
“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, environmental, literary, medical, religious, scientific, or technological nature.”
Colorado Business Corporations Act
The second key requirement for maintaining a PBC is that it produce and make public an annual report of public benefits. The report requires the PBC to select a third-party standard and include an assessment of the PBC’s performance against that standard. In Colorado, this means that the report must also include a description of (i) the ways in which the PBC promoted its public benefit and the best interests of its stakeholders, (ii) any circumstances that have hindered the PBC’s ability to promote its public benefit and the best interests of its stakeholders, and (iii) the rationale for the selection of a third-party standard. The PBC must send this report to each of its shareholders and post the report on its website (or, if it does not have a website, provide a copy to anyone who requests it).
Converting to a PBC from a different entity type
If you are already operating your business as a Colorado entity, there are two main ways to become a PBC, assuming at least two-thirds of the existing ownership interest holders agree to the change.
The first is to do a statutory conversion. The process for this is relatively simple. The directors of your corporation, or the managers of your LLC, create a plan of conversion which, among other things, explains how the ownership interests of the converting entity convert into the ownership interests of the resulting entity. The directors or managers then submit the plan of conversion to the shareholders or members for a vote. Two-thirds of the shareholders or members must approve the plan of conversion. Once approved by the owners, the company must file a statement of conversion with the Secretary of State’s office, along with articles of incorporation for a profit corporation operating as a public benefit corporation. (You can read about the specific requirements for the Articles here.) Once that is filed, you are officially a public benefit corporation and may begin running the company as such.
The second way to become a PBC is to dissolve your current entity and stand up a new entity, choosing the PBC form. The reason to take this course of action is if the company ownership, management, or operations will look significantly different under the new entity. For example, if your LLC has two members who split everything 50/50, and your PBC will take on three new owners who will each be contributing different types of property or services in exchange for their stock, it will likely be simpler to take this course of action. The alternatives would be to either issue ownership interests to the new owners in the converting entity prior to conversion, or issue shares of the new corporation to the new owners after conversion. In both of these alternatives, there are additional transactional steps which take time, money, and effort that are likely not worth it.
Under this second option there are a few key steps:
- (i) create the new PBC by filing articles with the Secretary of State,
- (ii) negotiate the terms of ownership of the new entity among the new owners,
- (iii) establish the board of directors for the new entity,
- (iv) by action of the board, approve the stock issuance according to the negotiated ownership structure,
- (v) dissolve the first entity and distribute that property to the owners of that entity,
- (vi) issue the PBC’s stock according to the negotiated terms.
With either method of conversion, be sure you consult with legal counsel to make sure you qualify and that your conversion is carried out to achieve the goals of your company. It’s easy to botch a conversion by leaving out a key property transfer.
Conclusion
For most companies that are just starting out, the process of becoming a PBC is not overly complicated. The more important discussion is to determine whether a PBC is the right entity for your business. There is considerable discussion and debate as to whether the PBC provides tangible advantages over a traditional corporation. It is important to remember that traditional corporations can also include a public benefit in their business purpose which would similarly require the directors to consider that purpose when making decisions. The relative novelty of the PBC statutes and the lack of case law dealing with PBC governance-related issues inserts a considerable degree of uncertainty into the individual board members’ decision-making process. For this reason, some view the PBC as more of a marketing decision rather than a legal one.
Regardless, if you are interested in operating your business as a PBC, it is important to talk to legal counsel in order to understand the pros and cons of this move and make an informed decision. If you’d like to understand whether a PBC might be right for you, get in touch.
[1] C.R.S. § 7-101-503.
[2] This article assumes all owners desire that the company become a public benefit corporation. If this is not the case, the process is a bit more complicated and may require the company to buy out any dissenting shareholders according to the Dissenter’s Rights provisions of the Colorado Business Corporations Act.
