By Jaspreet Singh and Rishi Kant

(Reuters) – OpenAI on Friday outlined plans to transition its for-profit arm into a Delaware public benefit corporation (PBC) to raise capital and remain competitive in the high-stakes AI race against firms like Google (NASDAQ:GOOGL).

OpenAI's new structure seeks to create a more investor-friendly corporation while maintaining a commitment to fund a related charity.

Rivals, including Anthropic, have also embraced the PBC structure to balance social interests with shareholder value.

What is a Public Benefit Corporation?

Although PBCs and traditional corporations are both for-profit entities, PBCs are legally obligated to pursue public benefits, such as social and environmental goals.

In 2013, Delaware amended its general corporation law to facilitate the formation of PBCs, and by December 2023, there were 19 publicly traded PBCs, according to research by Jens Dammann from the University of Texas.

In its blog, OpenAI described its current structure as "a for-profit, controlled by the non-profit, with a capped profit share for investors and employees."

Under the new organization, the non-profit will own shares in the for-profit, akin to outside investors, while the for-profit will fund the charitable efforts of the non-profit.

OpenAI stated, "The PBC will run and control OpenAI's operations and business, while the non-profit will hire a leadership team and staff to pursue charitable initiatives in sectors such as healthcare, education, and science."

Difference between a PBC and Other Corporate Structures

Non-profit corporations, unlike PBCs, do not have shareholders and reinvest profits into their missions rather than distribute them to individuals.

PBCs do not enjoy special tax exemptions or incentives, whereas non-profits are generally exempt from federal income taxes if they fulfill specific criteria.

Limitations of PBCs

Transitioning to a benefit corporation does not ensure that a company will prioritize its stated mission over profits. The law only requires the board to "balance" mission and profit-making interests, noted Ann Lipton, a corporate law professor at Tulane Law School.

Delaware law mandates that companies report their progress towards their goals to shareholders, who ultimately influence how strictly a PBC adheres to its mission, Lipton explained.

Lipton further added, "The only reason to choose benefit form over any other corporate form is the declaration to the public. It doesn't actually have any real enforcement power behind it."

Some legal experts also argue that publicly traded PBCs may be more vulnerable to takeovers, as bidders might claim that the company lacks a focus on profit maximization or that its public benefit goals conflict with their interests.

Some Existing PBCs

• Anthropic and xAI: OpenAI's competitors that have also adopted PBCs.
• Allbirds (NASDAQ:BIRD): A San Francisco-based PBC selling sustainable shoes and apparel.
• Kickstarter: A New York-based PBC providing a global crowdfunding platform for creative projects.
• Patagonia: A California-based retailer committed to environmental initiatives, contributing over $230 million to environmental organizations.
• Warby Parker (NYSE:WRBY): A New York-based eyewear retailer with a social initiative policy that supports those in need.