INDIANA BUSINESS LAW BLOG

This is the final installment in a series of articles dealing with Indiana’s new benefit corporation statute in general and its applicability to small businesses in particular, and we now arrive at the ultimate question:  Is it a good idea for a small businesses to incorporate as (or to convert to) a benefit corporation?

In our opinion, the best choice of entity for most small businesses is a limited liability company, not a corporation, and the new benefit corporation statute does not change that opinion. Although we think the benefit corporation statute is an excellent addition to Indiana corporate and business law, we believe the Indiana LLC statute already has enough flexibility to permit LLCs to adopt the same governing principles, policies, and procedures that are pre-packaged in the benefit corporation statute without giving up the other advantages that LLCs have over corporations in general.

First, the Indiana Business Flexibility Act allows LLCs to be organized for “any business, personal, or nonprofit purpose,” which certainly seems broad enough to include the combination of business and public benefit purposes for which benefit corporations are created. Second, all of the governance, transparency, and accountability provisions of the benefit corporation statute can be incorporated into a limited liability company’s operating agreement. Finally, certification as a B-Corp is not restricted to benefit corporations – essentially any form of business entity is eligible to be certified as a B-Corp, including LLCs.

Part I of this series briefly discussed Indiana’s new benefit corporation statute as well as certification of a company as a B Corp by B Lab and some of the their possible advantages.  Part II began a closer look at the details of the benefit corporation statute, including the question of whether the benefit corporation is a good choice for small businesses.

The “Benefit” Part of a Benefit Corporation

As we’ve mentioned before, a benefit corporation is one with purposes in addition to making money for its shareholders. All benefit corporations share the purpose of creating a general public benefit, defined as having an overall material positive impact on society and the environment.  In addition, benefit corporations may also establish for themselves the purpose of creating a specific public benefit that serves one or more public welfare, religious, charitable, scientific, literary, or educational purpose or another purpose that goes beyond the strict interests of the shareholders.

Part I of this series briefly discussed Indiana’s new benefit corporation statute as well as certification of a company as a “B Corp” by B Lab and some of the possible advantages of certification and of incorporation under the new statute.  Part II begins to look more closely at the details of the new law and to consider whether it makes sense for small businesses to incorporate under the new statute.

From a corporate law perspective, benefit corporations are, first and foremost, corporations subject to the Indiana Business Corporation Law, just like any other Indiana for-profit corporation.  In our view, a corporation is not the best choice of the form of entity for most small businesses.  For a number of reasons, including the tax alternatives available to LLCs, the “pick-your-partner” and charging order provisions of the Indiana LLC statute, and the fact that LLCs have fewer corporate formalities that must be observed (which decreases the possibility that the liability shield that protects the assets of owners from the creditors of the business will be disregarded through so-called veil-piercing), we believe that a limited liability company is a better choice than a corporation for most small businesses.

The above advantages of LLCs over corporations are the same – or even greater – for benefit corporations.  For example, partnership taxation is not an option for benefit corporations; if that is important enough, a benefit corporation is not a viable alternative.  In addition, the benefit corporation adds more required corporate formalities on top of those already imposed by the Indiana Business Corporation law, increasing the administrative burden and the possibility of weakening the liability shield protecting the assets of owners from the company’s creditors.  In other words, for most small businesses, a benefit corporation will not be the best choice of entity for most small businesses, unless the advantages of incorporating as a benefit corporation outweigh the advantages of organizing as a limited liability company.