Your law firm’s choice of entity is not usually a client magnet. Clients generally don’t choose your firm because you incorporated as a professional corporation or a limited liability partnership. With the advent of the benefit corporation and B Corp, however, how you have organized your law firm suddenly matters, especially to the right clients.
This article explores whether or not it makes sense to organize your law firm as a professional benefit corporation and/or B Corp to help you attract the growing number of clients seeking a law firm aligned with their social and environmental values. These clients include impact investors, devotees of sustainability practices, those committed to social responsibility, and entrepreneurs creating businesses that have meaningful purposes in addition to generating revenue.
These new alternatives will only be appropriate for your law firm, however, if having a positive impact on society and the environment is truly important to your lawyers. Impact is the new measure of business success. Your law firm may have a bigger impact and attract more values-aligned clients by expressing the commitment inherent in the professional benefit corporation and B Corp to create a positive impact on society and the environment.
The Difference Between a Benefit Corporation and a B Corp
Benefit corporations and B Corps are different even though both are often referred to as B Corps. A benefit corporation is a legal term referring to a particular type of for-profit corporation and a B Corp is a term of art referring to any business, including LLPs, that has passed B Lab’s Certified B Corporation social and environmental impact assessment, the leading third-party assessment tool.
Understanding the Professional Benefit Corporation
A professional benefit corporation is identical to a traditional PC except for three additional requirements: general public benefit, accountability and transparency:
- First, it must create general public benefit, which means “a material positive impact on society and the environment, taken as a whole … from [its] business and operations.”
- Second, accountability comes from the requirement to measure the creation of such general public benefit against an independent third-party standard such as B Lab’s Certified B Corporation assessment, which measures a business’ social and environmental impact.
- Third, transparency comes from the requirement to provide an annual benefit report to the owners and the public describing the general public benefit created.
At the heart of becoming a benefit corporation is the requirement that partners consider the effects of any corporate action or inaction on all of the firm’s stakeholders, including employees, customers, suppliers, the communities in which the firm is located, society, the environment and partners.
Some of your partners may resist this new approach to business out of fear that it creates additional liability exposure. Such fears are unfounded, because only stockholders have standing to sue the corporation for failure to create general public benefit and the remedy is injunctive relief, not monetary damages. The likelihood of such an action is remote for a professional benefit corporation whose stockholders are limited by law to lawyers practicing for the firm. In addition, benefit corporation law generally contains an express waiver for directors for liability for monetary damages for failing to create general public benefit and affirms that directors are protected by the business judgment rule in fulfilling their expanded fiduciary duties.
Most states with benefit corporation legislation permit lawyers to incorporate their professional corporations in this new form, but such authorization may not be explicit. Lawyers in California, for example, may organize their professional corporations as benefit corporations even though the benefit corporation legislation does not expressly authorize it.
Understanding the B Corp
Your law firm can take the Certified B Corporation assessment for free at www.bcorporation.net. A passing score is an excellent indicator that your firm has the social and environmental orientation necessary to use these new alternatives. There is an annual fee for B Corp certification, which also allows your firm to join the growing community of more than 2,200 like-minded B Corps around the world.
B Corp certification additionally requires making legal commitments to create a material positive impact on society and the environment, and to consider the interests of all stakeholders in taking action. Incorporation of your law firm as a benefit corporation in one of the 33 states, including Delaware, that have adopted them automatically meets this requirement.
Your law firm can still become a B Corp if it is incorporated in a state without benefit corporation legislation or as an LLP. Certification in constituency statute that states which allow directors to consider the interests of other stakeholders requires amending the articles of incorporation to include the purpose of creating public benefit and to make mandatory the consideration of the interests of all stakeholders.
Equivalent commitments are required for corporations from the handful of states without benefit corporation or constituency statutes, for social purpose corporations and for corporations from a few states with unique circumstances. Certification for LLPs requires adding similar commitments to a law firm’s partnership agreement.
Becoming a Benefit Corporation
It is easy to incorporate a new law firm as a professional benefit corporation. Most statutes simply require a statement in the charter saying that the corporation is a benefit corporation.
Converting an existing professional corporation into a benefit corporation is more complicated because most states have extended statutory dissenters’ rights to stockholders who vote against converting into a benefit corporation and wish to cash out.
Law firms tend to be consensus-driven organizations that unanimously approve major decisions, so it is unlikely that anyone would dissent if there were broad support in your firm for conversion. In addition, it is unlikely that lawyers would exercise dissenters’ rights because any dissenting lawyer would cease to be a member of the firm after his or her shares were repurchased.
Customizing Your Governance Architecture
If your law firm supports a particular social or environmental cause, becoming a benefit corporation allows you to include a specific public benefit in your charter that expressly authorizes the firm to support such particular cause(s). Since many law firms provide pro-bono legal services, an obvious specific public benefit might be to provide pro-bono legal services to low income or underserved individuals.
Living Your Values
If you and your colleagues are naturally inclined to benefit society and the environment, becoming a benefit corporation and/or B Corp is a natural choice. It is also smart business because the economic data shows that businesses that adopt principles of sustainability and a multiple stakeholder model, such as those embedded in the benefit corporation and B Corp, outperform their conventional peers and are more profitable for their owners.
Your choice may help attract potential clients in the fastest-growing consumer segment — LOHAS — lifestyles of heath and sustainability — who make buying decisions based upon a corporation’s values.
For the benefit corporation and B Corp to work for your law firm, however, you must live your social and environmental values.
***** John Montgomery is an entrepreneur, corporate attorney, transformation management consultant and executive coach. He is the founder of two benefit entities and Pending B Corps, Lex Ultima Consulting LLC and Lex Ultima, PC. He was co-chairman of the legal working group that drafted California’s benefit corporation legislation, and is the author of Great from the Start: How Conscious Corporations Attract Success. He is also the President-Elect of the Benefit Company Bar Association. Reach him at email@example.com.
The views expressed in the article are those of the authors and not necessarily the views of their clients or other attorneys in their firm.