Colorado Public Benefit Corporations (Part I): Looks Like A Go, But Name Change Part of the Deal

It looks like Colorado will soon join 15 other states in allowing for the creation of a new type of entity, called a “benefit corporation.” A benefit corporation, at its core, is for-profit corporation (with private shareholders), which serves a dual purpose of pursuing profits and promoting social objectives. One of the primary reasons cited for creating this new type of hybrid entity is that it allows a board of directors to take a balanced approach to pursing profits and social objectives, without the threat of derivative actions by its shareholders.

The latest version of the legislation has been passed by both the Colorado Senate and House and is awaiting the governor’s signature. The twist? Colorado’s new hybrid entities will technically be called “public benefit corporations” rather than “benefit corporations.” Why? Read on!

Impact on Nonprofits. Because benefit corporations are essentially for-profit corporations with a dual purpose, the nonprofit sector has been largely on the sidelines as the legislation evolved. However, nonprofits will most definitely be impacted by the creation of these new entities, so we wanted to begin a series of blog posts to highlight the impact. Our first post focuses on the new entity’s name.

Bottom line: the change in name from “benefit corporation” to “public benefit corporation”—the result of a last-minute compromise—could spell potential trouble for the nonprofit/charitable sector.

Evolution of Legislation. The evolution of benefit corporation legislation in Colorado has resembled the game of musical chairs.

Model legislation developed and promoted by B Lab—a company that operates a related proprietary certification program—was introduced in Colorado during the 2012 regular session. It received staunch opposition from several prominent members of the Colorado Bar Association (CBA). They expressed a number of well-founded policy and corporate concerns about the legislation, which if left unaddressed, could lead to real problems down the road. The model legislation ultimately failed to pass during the regular session.

A substantially stripped-down version of the model legislation—this time developed and supported by the CBA—was introduced in the 2012 special session. That legislation also failed to pass, but due to distractions brought about by other political controversies at the time (mostly around civil unions).

Early in the 2013 session, another less-stripped-down version of the model legislation was introduced and passed by the House. That legislation was also developed and supported by the CBA. Appreciating the strong public desire to create benefit corporations in Colorado, the drafters started with the B Lab model legislation, and modified it to increase flexibility and address the most problematic aspects of the model legislation.

Who opposed the CBA legislation when it got to the Senate? B Lab and some of the companies certified by B Lab! They argued that the House Bill did not have the same rigor as their model legislation and, as a result, diminished the “benefit corporation” brand.

About this same time, another stripped-down version of the model legislation began its journey through the Delaware legislature. From this author’s perspective, it addressed many of the same concerns addressed in the CBA legislation (albeit in different ways). But for some reason, B Lab did not oppose Delaware’s legislation … so long as the new hybrid entities were not called “benefit corporations.”

Since the CBA also supported the Delaware legislation, both the House and the Senate ultimately passed legislation very similar to the Delaware legislation, calling our new hybrid entities “public benefit corporations.” It’s that version of the legislation that is awaiting the governor’s signature.

Problematic Name Change. The change in name from “benefit corporation” to “public benefit corporation” was a last-minute compromise intended to address concerns raised by B Lab (and its certified companies) that a stripped-down version of the model legislation, in states like Colorado and Delaware, would create confusion and lack of accountability in the world of benefit corporations.

But what about the confusion and lack of accountability just created in the world of nonprofit corporations? The term “public benefit corporation” is a term that is already taken and in use by the nonprofit sector!

For decades now, nonprofits corporations in many states have been classified as either “public benefit corporations” or “mutual benefit corporations.” Both are nonprofit corporations without shareholders. Public benefit corporations are operated for the public benefit, and charitable organizations generally fall into this category. Mutual benefit corporations operate for the benefit of a specific group of persons (e.g., members), and trade associations generally fall into this category. Colorado does not make this distinction in its nonprofit corporations, but many other states do—including our neighbor, Wyoming.

We are skeptical about whether the change in name will avoid or add to public confusion about what benefit corporations are. We also wonder whether the change in name was really necessary for benefit corporations generally, or whether it was necessary to protect B Lab’s own brand and the integrity of its certification program.

But in the end, it’s the nonprofit sector that must now deal with public confusion. We need to deal with confusion about whether a “public benefit corporation” is a for-profit corporation with shareholders, or a nonprofit corporation without shareholders, and what “public benefit” means in each context.

We intend to ask the Office of the Colorado Secretary of State (and assist them) in doing everything possible to minimize the potential confusion for the nonprofit sector, and encourage everyone in the nonprofit sector to speak up as well.

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