What is a PBC, anyway?

In recent years a relatively new legal entity has begun gaining some attention, in law nerd circles and otherwise.  Some household-name companies have made the switch, including Kickstarter PBC and Plum, PBC (a/k/a Plum Organics).  That entity is the public benefit corporation or “PBC.”  Read on to learn what makes a true PBC different from a regular corporation, and where the “B-Corp” designation fits in overall scheme of things.

Quick note on terminology

A quick clarification on terms, as some folks are still prone to the error of using the terms “public benefit corporation” or “PBC” interchangeably with “B-corp,” though these two designations are actually not at all the same.  A PBC is a type of business entity, like “corporation” or “LLC.”  A “B Corp” is a company (it may a PBC or it might not be) that has received a certification, similar to the “Fair Trade” certification you might look for when shopping coffee.  The designation is doled out by (ironically) a nonprofit organization B Labs, which puts potential B Corp candidates through their paces with its “Impact Assessment,” examining the companies’ performance across five different “impact areas”: Governance, Workers, Community, Environment, and Customers.  Patagonia, for example, has been “B-Certified” since 2011.  Today, there is a growing community of more than 1,700 Certified B Corps.

What makes a PBC special?

Generally the core differences between the main types of business entities have to do with how they are run on a day to day basis and how they’re taxed.  For example, a group of management consultants who plan to stay with business for a long time to come might opt to form an LLC, so they can take advantage of relatively few statutory requirements for meetings and formal documentation of decisions, and they might prefer the default pass-through taxation of the LLC entity type. On the other hand, a fast-scaling software team might opt for a corporation, since they won’t be turning a profit for a while and they plan to be taking on investors in the near future.  Both of these entities, when organized under the laws of the state (be it Delaware or Alaska), must expressly set out some sort of business purpose.  To give those companies the widest possible latitude, many companies’ formation documents simply state that the purpose “is to engage in any lawful act or activity for which a corporation may be organized under the law.” Fairly generic, and exceptionally broad. 

A PBC, however, is different from these “standard” profit-seeking business entities in that which is a relatively new entity type (recognized in 19 states and the District of Columbia), must have an express purpose statement expressly setting forth the public benefit or benefits the entity will pursue. In Colorado, a public benefit is defined 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, environmental, literary, medical, religious, scientific, or technological nature.”[1]

From a corporate filing perspective, the second key requirement of a PBC is to produce an annual report. The report requires the PBC to select a third-party standard and include an assessment of the PBC’s performance against that standard. 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).

PBCs must adhere to several other requirements in operating the company; these vary considerably depending on the state.  For example, in Washington, DC, the PBC statute requires that the board of directors follow specific guidelines in acting as company directors or officers. Specifically, the board of directors, committees of the board, and individual directors of a benefit corporation, when voting, “[s]hall consider the effects of any action upon:”

(A) The shareholders of the benefit corporation;

(B) The employees and work force of the benefit corporation, its subsidiaries, and its suppliers;

(C) The interests of customers as beneficiaries of the general public benefit or specific public benefit purposes of the benefit corporation;

(D) Community and societal factors, including those of each community in which offices or facilities of the benefit corporation, its subsidiaries, or its suppliers are located;

(E) The local and global environment;

(F) The short-term and long-term interests of the benefit corporation, including benefits that may accrue to the benefit corporation from its long-term plans and the possibility that these interests may be best served by the continued independence of the benefit corporation; and

(G) The ability of the benefit corporation to accomplish its general public benefit purpose and any specific public benefit purpose;

The directors “[m]ay consider other pertinent factors or the interests of any other group that they deem appropriate,” and they “[n]eed not give priority to the interests of a particular person or group … over the interests of any other person or group, unless the benefit corporation has stated in its articles of incorporation its intention to give priority to certain interests related to its accomplishment of its general public benefit purpose or of a specific public benefit purpose identified in its articles of incorporation.”

Put another way, PBC directors have a great deal of discretion. 

Wrapping it up

No matter how you’re thinking about signaling to your stakeholders and investors that you’re serious about more than one “bottom line,” it’s important to understand whether a PBC is the right entity for your business. It’s 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 entity type and make an informed decision.

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[1] C.R.S. § 7-101-503.

Foundry Legal is a transactional and regulatory practice in Denver, CO.  We represent non-profit and social impact companies in New York, Washington DC, and in Colorado.  For more information reach out to us at info@foundry.legal.