Benefit Corporations vs Public Benefit Corporations in Iowa
In 2021, Iowa enacted a new type of corporation, the Benefit Corporation, via HF844, signed by Governor Reynolds June 8, 2021. This added subchapter 17 to chapter 490 of the Iowa Code, the chapter controlling corporations.
This is a welcome addition because it brings to Iowa a new twist to the corporate structure. Corporations have a profit motive, but now, in Iowa, as in many other states, they can additionally have a “public benefit” motive. Such a motive is defined in the Iowa Code as, “a positive effect, or reduction of negative effects, on one or more communities or categories of persons or entities, other than shareholders solely in their capacity as shareholders, or on the environment, including effects of an artistic, charitable, economic, educational, cultural, literary, medical, religious, social, ecological, or scientific nature.” Effectively, this permits a corporation to have simultaneously a profit motive and a public benefit motive.
Interestingly, Iowa law already mentions a similarly named “public benefit corporation” in chapter 504. What is a public benefit corporation? According to 504.1705, a nonprofit corporation registered according to chapter 504 that is not a religious organization, has a charitable purpose, and is except under IRS 501(c)(3) statute is a public benefit corporation.
So what is the difference between a “benefit corporation” as defined in chapter 490 and a “public benefit” corporation as described in chapter 504? A benefit corporation is a for-profit corporation that additionally has a beneficial purpose, while a public benefit corporation is a non-profit corporation that is tax exempt under 501(c)(3) standards and is not a religious organization. In short, an Iowa “benefit corporation” may have both a profit and public benefit motive while an Iowa “public benefit corporation” is a charitable non-profit organization.
If you want to start a benefit corporation, you form a corporation in the usual way, but your articles of organization must include a public benefit provision. The name may end in “benefit corporation” or the abbreviation B.C. Directors of a benefit corporation have a duty to act in a manner consistent with the public benefit. Also, an annual “benefit report” must be prepared and distributed to shareholders. A member of the public may request a copy of the annual benefit report free of charge.
Very importantly, certain types of derivative suits are limited or barred. A derivative suit is a type of lawsuit brought by a shareholder of a company on behalf of the company against board members or executives. A common reason for such suits is that the board of directors failed to serve the profit motives of the company. With a benefit corporation, a suit would be limited if the board served the beneficial purpose at the expense of profits.
If you want to start a public benefit corporation, you would follow a different process. You instead create an Iowa non-profit corporation that has a charitable purpose. Then, you would complete IRS form 1023 or 1023EZ to request tax exempt status under chapter 501(c)(3) of the IRS code. While such an organization may have directors, and its directors may be paid a salary, the organization cannot have a profit motive and distribute earnings in the form of profits.
This may seem counter intuitive, because the directors may be paid for their work, even though there are not profits. For example, a director of an art museum may be paid for her time, effort, and experience. However, if the money received in donations exceeds the amount needed to operate, that surplus may not be paid to the director as a profit. Instead, it will be repurposed into the upcoming budget. In the context of a for-profit corporation, that surplus would likely be paid out to the shareholders of the company as dividends.