By Jaspreet Singh and Rishi Kant
(Reuters) – OpenAI outlined a plan on Friday to convert its for-profit arm into a Delaware Public Benefit Corporation (PBC) to help it raise capital and stay ahead in the costly AI race against companies like Google (NASDAQ :).
OpenAI’s new structure is intended to potentially make it a more investor-friendly company, while maintaining the mission of funding a related charity.
Rivals, including Anthropic, have also adopted the PBC structure to balance social interests with shareholder value.
WHAT IS A BUSINESS COMPANY?
Although both PBCs and traditional corporations are for-profit entities, PBCs are legally required to pursue one or more public benefits, including social and environmental objectives.
Delaware amended its general corporate law to allow the formation of PBCs in 2013, and according to research by Jens Dammann of the University of Texas, there were 19 publicly traded PBCs as of December 2023.
In its blog, OpenAI described its current structure as “a for-profit, controlled by the non-profit organization, with capped profit participation for investors and employees.”
Under the new organization, the nonprofit will own stock in the for-profit, similar to outside investors, and the for-profit will fund the nonprofit’s charitable mission.
“The PBC will direct and control OpenAI’s operations and operations, while the nonprofit will hire a leadership team and staff to pursue charitable initiatives in sectors such as healthcare, education and science,” the report said.
DIFFERENCE BETWEEN A PBC AND OTHER BUSINESS STRUCTURES
Unlike PBCs, nonprofits do not have shareholders and reinvest profits into their mission rather than distributing them to individuals.
PBCs receive no special tax exemptions or incentives, while nonprofits are generally exempt from federal income taxes if they meet certain requirements.
LIMITATIONS OF PBCs
Becoming a benefit corporation does not guarantee that a company will put its stated mission ahead of profits, as the law only legally requires the board to balance its mission and profitable interests, says Ann Lipton, a business law professor at Tulane Law School.
Delaware law requires the company to report on progress toward goals to shareholders, which in practice determine how closely a PBC adheres to its mission, Lipton said.
“The only reason to choose the benefit form over any other form of business is the statement to the public. There is actually no real enforcement power behind that,” Lipton added.
Some legal experts also say that publicly traded PBCs are more susceptible to takeovers because bidders may argue that the company is not profit maximizing or that public interest objectives conflict with the bidder’s objectives.
SOME EXISTING PBCs
Anthropic and xAI: OpenAI’s rivals, Anthropic and Elon Musk’s xAI, have also adopted PBCs.
All birds (NASDAQ:): Allbirds is a San Francisco-based PBC that sells sustainable shoes and apparel made from natural materials.
Kickstarter: Kickstarter is a New York-based PBC that maintains a global crowdfunding platform for creative projects.
Patagonia: Patagonia is a California-based retailer of outdoor recreation apparel, gear, and food. According to its website, the company has contributed more than $230 million to environmental organizations.
Warby Parker (NYSE:): Warby Parker is a New York-based manufacturer and retailer of eyewear products. The company’s “Buy a Pair, Give a Pair” policy is intended to help those in need.
