Where are all the Colorado PBCs?
On April 1, Colorado started offering businesses the option of establishing themselves as public benefit corporations (PBCs). This measure essentially allows a for-profit company to weave the intent to benefit the community at large into its articles of incorporation.
Ideally, this new designation would allow companies to differentiate themselves from S corps and C corps, which are solely established to maximize profit for shareholders, and non-profit entities. It’s a gray area of corporate law that has been addressed in 25 states and Washington, DC, in addition to Colorado.
Yet curiously, this movement, which has generated hundreds of similarly incorporated companies across the U.S., has been somewhat of a dud here in Colorado.
Specifically, three months following the introduction of the new law, just 15 Colorado companies have incorporated as a PBC, according to the Secretary of State’s website. By comparison, Delaware registered more than 50 public benefit corporations in the first three months it offered the option in 2013, including 18 on Day 1. On Oregon’s first day, 24 entities registered as what that state calls benefit companies.
Frankly, the lack of interest here in Colorado is baffling, given its pockets of progressive and environmentally minded business owners. Of course, some of that may stem from stale partisan positioning as the related bill was backed by Democrats and shunned by Republicans in the General Assembly’s vote of approval last year.
Yet while allowing for such posturing, our hunch is that a portion of the lackluster response may stem from the inclusion of an ominous consideration by the Secretary of State’s office on PBC-related web pages. In short, when describing PBCs, the office raises the specter of having to register as charitable organization that solicits contributions. Which translates into an additional registration to become a PBC, an additional annual filing and, of course, additional fees.
Whether you’re just starting a business or are long-established in the community, even the hint of having to generate such additional paperwork is chilling, especially if your motivation for incorporating as a PBC is to strike a balance between profits and purpose, which is what the law is designed to allow.
Of course, every case is different, but we believe a prospective PBC is best served by understanding how the state defines a charity: an entity created “for any benevolent, educational, philanthropic, humane, scientific, patriotic, social welfare or advocacy, public health, environmental conservation, civic, or other eleemosynary purpose.” Note that eleemosynary means “of, relating to, or supported by charity”—a linguistic twist that allows the drafters of the provision the semblance, if not the reality, of avoiding a circular definition.
Alternatively, in a PBC’s articles of incorporation, owners and shareholders agree that the company will consider the social, economic and environmental effects of any action on current and retired employees, suppliers and customers of the PBC or its subsidiaries and the communities and society in which the PBC or its subsidiaries operate.
So as long as a PBC’s articles of incorporation state that the purpose of the company is to benefit shareholders while ensuring that it is a good citizen, it should remain outside the scope of the state’s definition of a charitable organization.
One other area where we could see the state’s approach to PBCs resulting in confusion is for those companies that have either conducted a Kickstarter or similar campaign or are intending to do so. After all, that’s a fundraising effort.
Yet again, the difference is relatively clear. Fundraising for a charity generates contributions for an organization to fulfill its altruistic purpose. Crowdsourcing by a for-profit enterprise, on the other hand, brings in cash to meet a business need.
That said, it wouldn’t hurt for any crowdsourcing pitch by a Colorado PBC to include the caveat that the monies raised will not be used for charitable purposes and that donations are not deductible.
From a legal perspective, we must advise that if you are uncertain about how you fall along the PBC/charity divide, you should check in with counsel. But if you’re a for-profit enterprise looking to benefit the communities you serve, clearly stating that you are not a charitable entity will help sharpen the distinction for your company.