Hybrid business proposal gains traction

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If you want to form a business in Minnesota you have two options:  a for profit corporation and non-profit organization.

That might be changing.

After many years of work, a bill to create a Public Benefit Corporation designation is poised to become law. It would be the first big change to business structure laws since limited liability companies were introduced more than 20 years ago. The entity would be a hybrid: the business would be for profit with no tax exemptions, but also have a social mission. The companies would have a dual bottom line. A public benefit corporation bill has been introduced before, but met resistance from different parties. The business law section of the Minnesota State Bar Association did not support last year’s version.

A working group of business lawyers and entrepreneurs and others with help from the Minnesota Secretary of State’s Office spent almost eight months working on a bill that was both  useful for professionals and palatable to non-profits and business lawyers. Sen. John Marty, DFL-ST. Paul, has told the group he will introduce it this session.

Kimberly Lowe, an attorney at Fredrikson& Byron, chaired the group. She said there have been different versions of the bill introduced in the past, but the motivating factor for the group to get serious happened when Delaware adopted a public benefit corporation designation. About 20 states now have the option. She said Minnesota’s corporate structure is unique to other states, but the group was able to write something that used examples from other states and brought them under one umbrella.

The end result is a menu option. Professionals can chose a general designation, meaning the company would be aligned with a general positive impact, or a specific designation, whereby companies have a self-defined mission like the environment or juvenile justice.

Lowe said the final product worked because the volunteers were willing to pitch in.

“We asked the people that would use [public benefit corporation designation] what they wanted to see. We asked young and old entrepreneurs to come in and talk to us about what was lacking and then we asked the lawyers what they thought of the suggestions,” she said. “It sounds simplistic but we wanted to have a bill that everyone could support.”

Tom Triplett, principal of Triplett Consulting, works with nonprofits across the U.S. He said once the designation is available he would encourage clients to use it to for subsidiary corporations. It would allow businesses to go after equity funding and grants simultaneously. In addition to the peace of mind, companies want the designation because it can be used as a marketing tool, he said.

“It’s a way to get that instant recognition,” he said.

Also, a sizable population of people with money want to use their investment dollars to accomplish a social benefit in addition to a financial return, said Brad Brown, the organizer of the IMNPACT Angels, an network of investors that focuses on companies with a social mission.  The public benefit designation could serve as a way to get noticed by those investors.

“It would signal to investors that this business was organized around a principle,” Brown said. “The investors I work with need a way to tell that there is a social purpose at play, that it’s not just window dressing.”

That is where the annual report comes in. It would be filed with the Secretary of State’s Office and detail the progress the business had made on its goal. The report would be available online, but not as stringent as the financial reports nonprofits are required to file.

“If you get the benefit of using the branding in the marketplace, the thought was, there should be some disclosure to give the public and the shareholders a look at how you are doing,” Lowe said.

The law was written with flexibility and that is why it will be appealing to lawyers advising their clients and people looking to start a business, said Heidi Christianson, an attorney at Nilan Johnson Lewis with many nonprofit clients.

The nonprofit regulations can often be too complex and burdensome for professionals, especially younger ones, she said. These people want to do some good but don’t want to report to the IRS or file conflict of interest forms, she said.  The public benefit label is well suited for those that fit in the middle of nonprofit rules and for profit ideology, she said. It also works because it gives all investors a chance to be heard. Two thirds of the shareholders must approve the designation if a company wants to convert. Those that dissent can be bought out.

“The most important thing for attorneys is we want to have a full complement of statutes in Minnesota, we don’t want to be left behind,” Christianson said. “I don’t want to take a client who wants to do this to Delaware to incorporate because we don’t have it.”