Like the TOMS Shoes Business Model? Try forming a Benefit Corporation

Kelleigh Irwin Fagan

Author: Kelleigh Irwin Fagan

POST DATE: 4.21.16

Indiana currently has 6 options from which business owners can decide on the type of legal entity for their company: a corporation, limited liability company, sole proprietorship, general partnership, limited partnership, and limited liability partnership. Starting January 1, 2016, a new type of entity is available—the benefit corporation. This is the first new entity option for business owners since 1993 when Indiana adopted the Indiana Business Flexibility Act giving Indiana business owners and entrepreneurs the option to form limited liability companies (the "LLC").

In addition to Indiana, 31 states have adopted legislation for benefit corporations, and such legislation is pending in 9 other states. Some well-known examples of benefit corporations on a national level are TOMS Shoes and Patagonia. TOMS Shoes donates a pair of shoes to a poverty stricken or third world country for each pair of shoes it sells. Patagonia uses exclusively environmentally friendly materials for all of its clothing and outdoor products.

The benefit corporation is formed for more than just maximizing profit for shareholders—one of its top priorities must be to create social and environmental benefits. Accordingly, directors and officers of a benefit corporation are protected from liability in pursuing the benefit corporation’s public benefit objectives. Indiana lawmakers adopted the legislation allowing this new type of business entity because there is a generation of people who want to be entrepreneurs for reasons beyond making a living—they also want their work to have a social impact. With the benefit corporation, Indiana now allows entrepreneurs that option while also providing a shield of liability.

In order to form a benefit corporation, the Indiana Secretary of State requires additional information from the company demonstrating the corporation’s purpose includes a social and environmental benefit. Benefit corporations will also go through a review process to ensure the corporation's operations are aligned with those social or environmental objectives.

If you are interested in obtaining further information about benefit corporations or have any questions, contact CCHA attorneys Kelleigh Fagan or Leslie Damer for more information.