Introducing the Totally Unnecessary Benefit LLC

The rapid proliferation of state statutes authorizing so-called “benefit” corporations—starting with Maryland in 2010 and spreading to over 30 states by 2018—has been premised in large part on the assertion that conventional corporate law mandates shareholder primacy. Under this legal mandate, the board of directors of a for-profit corporation must manage the business solely for the benefit of its shareholders. With the aim of maximizing shareholder wealth as a board’s singular focus, concerns for other, non-shareholding stakeholders, the public, and the environment are irrelevant except to the extent such concerns implicate the corporation’s profits.

Citing conventional corporate law’s mandate of shareholder primacy, advocates of benefit corporation legislation contend that the new statutory business form is a necessary and important addition to the existing legal landscape—one that accommodates for-profit businesses that are driven more by a social mission than a desire to maximize profits. For these purpose-driven “social enterprises,” the benefit corporation provides a legal framework that eschews conventional corporate law’s narrow focus on shareholder welfare. Using benefit corporations, social enterprises may promote the interests of various non-shareholding constituencies, the public, and the environment, thus pursuing corporate profits more responsibly and sustainably, without fear of shareholder lawsuits or director liability.

However appealing this notion of corporate altruism might be, as I explain in a forthcoming article, the legal justification for benefit corporations reflects a facile oversimplification of conventional corporate law. Conventional corporate law already enables purpose-driven businesses to pursue a social mission, even if doing so might curb a business’ ultimate profits.

But even if benefit corporations are legally unnecessary to accommodate social enterprises, the advent of benefit LLCs—the unincorporated analog to benefit corporations—has proven that the question of legal necessity is ultimately irrelevant to the legislative movement that is spawning these new socially-minded business forms. Benefit LLCs first emerged as a statutory business form in Maryland in 2010, at the same time as the first benefit corporation statute. Unlike its corporate counterpart, however, the benefit LLC languished in the intervening years, embraced by only three other states until very recently. That changed on August 1, 2018, when with relatively little fanfare Delaware became only the fifth state to enact a benefit LLC statute. Given Delaware’s unique importance in the business law world, one can now reasonably expect legislation and attendant interest in benefit LLCs to likewise flourish.

Yet, unlike benefit corporations, no one has attempted to articulate a plausible legal justification for benefit LLCs. No one has suggested that conventional LLC law mandates any form of “member primacy.” Indeed, the unanimous consensus is that conventional LLC law already permits a business ample flexibility to commit itself to balancing or even subordinating profits against a social mission. Put differently, as a legal matter, benefit LLCs are inarguably unnecessary.

Instead, I contend in my forthcoming article that the advent of benefit LLCs plainly reveals what was arguably already apparent in the context of its corporate predecessor: that the animating force behind benefit entity statutes is not law reform. Rather, it is about branding. It is about creating a state-sponsored designation for private entrepreneurs to signal the virtue of their for-profit business to consumers, investors, and the broader public.

But the creation of this state-sponsored brand should raise serious concerns about whether legislation authorizing benefit entities is an appropriate or worthwhile use of state power. In the absence of any meaningful accountability measures to ensure that businesses embracing the statutory “benefit” label are actually deserving of it, the state-sponsored “benefit” brand may be exploited by entrepreneurs to mislead the public and compete unfairly with conventional for-profit businesses. It is hard to see why legislatures should employ state power for private gain in this way, especially where there already exist private certifications available to socially-minded businesses seeking to distinguish themselves in the marketplace.

Moreover, even if statutory benefit entities do, in fact, live up to their “benefit” aspiration, they impose their own costs by adding needless complexity to the law and exacerbating the popular misperception that conventional for-profit businesses are purely profit-driven. The unintended result may be that conventional for-profit businesses retreat from socially-minded initiatives, resulting ironically in a net decrease in the public benefit arising from private enterprises.

Alas, state legislatures are unlikely to revisit their recently enacted benefit corporation statutes any time soon. The benefit LLC, however, presents a second opportunity to consider the need and rationale for a new statutory business form catering to social enterprises. My article makes the case that both types of statutory business entities—benefit corporations and especially benefit LLCs—are unnecessary as a legal matter and unwise as a policy matter.

This post comes to us from Professor Mohsen Manesh at the University of Oregon School of Law. It is based on his recent article, “Introducing the Totally Unnecessary Benefit LLC,” available here.

2 Comments

    • Brett McDonnell

      This is a good and important article, and I agree with it until a late point in the argument. There are two main rationales for benefit corporations. The one that gets the most press is the one you start with, the need to get around the shareholder primacy duty. I agree with you that this is probably unnecessary for corporations, and certainly unnecessary for LLCs. The second rationale is what you call “branding,” which I prefer to call commitment. The argument is that the statute gives companies a way to commit to investors, employees, and customers that they will consider stakeholder interests. You are also right that this is worthless in the absence of meaningful accountability mechanisms. But, at that point you should then note that the statutes do contain two potential mechanisms, fiduciary duty and a reporting requirement. The key question then becomes whether these two mechanisms provide meaningful accountability. There has been debate about that in the benefit corporation context–I personally come out somewhere in the middle.

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