Friday, April 1, 2011

Maryland Legislature Poised to Extend Option of "Benefit" Status to LLCs

Maryland limited liability companies that pride themselves on their commitment to environmental and social responsibility soon may be able to obtain legal recognition, separate from their less magnanimous competitors. If passed, Senate Bill 595 and its companion House Bill 1151 will allow willing limited liability companies to elect "Benefit" status--similar to the "Benefit" status already available to Maryland corporations.

Under the new law, a "Benefit LLC" would be a for-profit enterprise that nevertheless chooses to place a premium on creating a perceived positive impact on the environment and society. Although the managing members of a Benefit LLC would owe their fiduciary duties exclusively to the company (like the managers of any business), their obligation to act in furtherance of the company's environmental and social philosophies in addition to the company's financial interests (as opposed to solely the financial interests) means that what constitutes satisfactory performance of those fiduciary duties would be quite different from what is expected from the directors or managers of a traditional corporation or LLC.

The legal advantage to Benefit LLC status would be that such a company's managing members would enjoy a significant degree of insulation from liability, if a disgruntled member files a derivative action based on the company's decision to forgo maximum profitability in the name of environmental or social responsibility. This would provide the managing members with greater freedom in running the business (however, there is a compelling argument that, in one sense, the managing members of a Benefit LLC actually would have less freedom, as their ability to pursue profits would be tempered).

Although still little-known and even less understood, Benefit status has been available to willing corporations in Maryland since October, 2011. Vermont also allows corporations to elect a similar legal status. In a Benefit corporation, directors must consider a proposed decision's impact on the long-term financial well-being of the company, the environment, the community, the company's employees, and society in general. To lessen the subjectivity involved in deciding the proper balance of those considerations, the Benefit corporation law requires directors of a Benefit corporation to inform their decision-making by looking to independent third-party standards that assess best practices in corporate social and environmental performance.

It appears that the Benefit LLC law will be similar, if not identical, in that regard. LLCs willing to elect Benefit status were right to complain about not being included in the Benefit corporation law, when it went into effect in October. As it turns out, many of the corporations electing Benefit status are small businesses with one or two shareholders, unlikely to wind up embroiled in derivative litigation. For such a corporation, however, there is nevertheless a very real business advantage in being able to say that the company is vetted as a good corporate citizen. That is what many LLCs want to be able to say as well, and the reason they would like to see the Benefit LLC law passed.

If the Benefit LLC law is enacted, its practical effect for participating LLCs, many of which likely will be small businesses with one or two owner-operators, will be that those companies can now market themselves as environmentally and socially conscious to potential customers, suppliers, investors, or anyone else they may hope to do business with. Because a Benefit LLC's legal framework would require it to work for a positive environmental and societal impact, as measured by a third-party standard, others considering doing business with the company would know that the company's stated ethos is more than just puffery. That could be a significant business advantage. Indeed, consumers are placing more and more emphasis on environmentally sustainable products and services. Moreover, many larger corporations are starting to create positions for "chief sustainability officers," whose job is to improve the corporation's environmental performance; thus, companies with Benefit status might have a distinct advantage over competitors, when seeking to supply goods or services to those large corporations.

For many small businesses, incorporating simply is impracticable because of the tax consequences. Thus, they operate as LLCs. Currently, however, the business advantage of Benefit status is not available to LLCs. By enacting the Benefit LLC law, the Maryland General Assembly would promote environmental and social responsibility and encourage business growth in Maryland. Both goals are laudable.

--Peter Sheehan

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