What's the Big Difference About a B Corp?

What’s the Big Difference About a B Corp?

What’s the Big Difference About a B Corp?

Minnesota’s Public Benefit Corporation (which became an option for Minnesota businesses January 1, 2015) is not a nonprofit or a pass-through tax entity like a partnership or limited liability company that does not pay a corporate tax rate, but whose members are responsible for paying taxes. Rather, a public benefit corporation is a profit-making organization that would otherwise operate as shareholder-owned corporation under Minnesota Statutes Section 302A… but with a twist!

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So how else is a Benefit (or “B”) corporation different? One big area that investors in a B corp should be aware of is the possible limitation on certain shareholder litigation claims they could otherwise file against a corporation organized under Minnesota Statute Section 302A.

In Dodge v. Ford (Mich. 1919) (yes, that Dodge and that Ford), the Michigan Supreme Court held that the purpose of a corporation is to make money for the shareholder and minority shareholder are entitled to equitably sized dividends. Due to the Model-T’s success and an innovative assembly line, Ford Motor Co. amassed a capital surplus of $60 million by 1916. By that time, Henry Ford wanted to employ more workers, make the autos affordable for the assembly workers, and  help workers build their lives.

Dodge, as a minority shareholder, disagreed and filed suit against Ford arguing that the purpose of the company was to maximize shareholder profits – and not to benefit the community by making affordable cars or employing more workers. Both the trial court and Michigan Supreme Court agreed with Dodge, ordering Ford to pay out a big dividend to shareholders. Dodge v. Ford explains that although courts will generally defer to the business judgment of executives, executives cannot arbitrarily withhold money that could go to shareholders. The court determined that the corporation is a profit-making business,  and management’s primary duty is to maximize shareholder wealth. Dodge then used this dividend money as seed money for a new automobile startup.

So, potential B corp investors should be aware – While a successful public benefit corporation will likely do what it can to generate revenue and maximize profits, the corporation’s profits may not always be maximized because the general or specific benefit must be fulfilled before paying dividends to shareholders. Status as a Public Benefit Corporation essentially acts as notice to institutional investors, trustees or those with fiduciary duties to maximize returns on investment that the benefit will need to come first.

 

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