European Regional Forum Western and Israel Regional Working Group report
Portolano Cavallo, Rome
As one of the largest of the ERF regional groups, each bi-monthly call tends to involve plenty of discussion over areas of common interest, as well as an opportunity for members to highlight a key trend that they are experiencing or a particular area of focus they may have within their jurisdiction.
Recently our Italian member Antonia Verna updated us on the latest trends in the Italian market for startups and benefit corporations, better known as B Corporations.
In 2012, the Italian government introduced a new type of startup aimed at encouraging innovation, known as an ‘innovative startup’. As it appears, Italy can be considered a true pioneer in this field, as it fosters the creation of such companies by offering certain advantages for the startups themselves and their investors. Even more importantly, that 2012 regulation, amended and updated over the years, is designed to drive a technological revolution across the country.
First things first: what does it take for a startup to be considered innovative?
One of the main requirements is based on corporate purpose. A startup must develop, produce and trade innovative goods or services that have a high technological value. Although the legislator did not set forth a precise definition of the latter, the definition of high technological value can be pieced together by looking at the other requirements, with regard to: (a) allocation of costs for research and development; (b) a workforce composed of academically qualified individuals (eg, PhDs, PhD candidates and researchers, etc); and (c) the ownership/assignment of an industrial property right, related to the core business. There are also additional requirements regarding business value and company type.
Last but not least, a startup may be considered ‘innovative’ only for the first five years following its incorporation.
As mentioned above, an innovative startup is entitled to receive several advantages, including the key opportunity to save on some incorporation costs and to get access to crowdfunding portals and alternative financial instruments. Furthermore, innovative startups may benefit from certain tax credits when they hire highly qualified employees through employment contracts of unlimited duration, and they may not be subject to the existing tax treatment for ‘shell and dormant companies’. It should be noted that even more advantages are provided for startups incorporated as limited liability companies.
However, startups are not the only companies that may benefit from being innovative. Individuals and legal entities investing in such startups are also entitled to some tax relief under certain terms and conditions. Individuals subject to personal tax may benefit from tax credits, while companies and other entities that are not innovative startups and are subject to corporate tax may be entitled to deductions.
Italy has shown itself to be a true leader by being the first European country to issue a regulation on benefit corporations, in 2015.
The benefit corporation was created as part of a movement aimed at reshaping how for-profit corporations conduct business to create benefits in the form of profit and otherwise. This model is based on the B Corp Certification created and issued by B Lab, a not-for-profit global private organisation. Although initially the movement had no legal recognition and was not subject to any specific regulation, since 2010 some states within the US have issued and implemented specific regulations regarding benefit corporations. That legal framework then spread to various countries worldwide.
In Italy, a benefit company is not a new type of business organisation (such as a limited liability company or a joint-stock company). It is merely a qualification that any type of company can obtain by amending its corporate purpose in its articles of association. The purpose of the Italian law was to help establish companies and create growth for companies that (a) pursue one or more objectives considered to be ‘for the common good’; (b) operate in a responsible, sustainable and transparent manner vis-à-vis individuals, communities, territories, the environment, cultural and social heritage, entities and associations, as well as all other stakeholders; and (c) pursue one or more positive effects. The corporate purpose of such companies must reflect this aim. Therefore, each year, the managing body of a B Corporation drafts an annual report detailing the common good pursued by the company.
Qualification as a benefit company – unlike qualification as a startup – does not yield direct benefits or advantages, such as derogations from applicable corporate laws. In part, this represents an attempt to avoid accusations of greenwashing, a sensitive topic at the moment.
The B Corporation concept was introduced to meet new challenges that our society is facing. Nowadays, the social responsibility of a business goes far beyond increasing profits, contrary to what Milton Friedman once proclaimed in The New York Times. Companies must learn how to turn a profit into a broader goal by respecting and protecting our environment and our communities. In this manner profit and nonprofit goals can be reached together.
It is good to see that more and more companies are focusing on ESG objectives and are making good use of the B Corporation model. Indeed, this model can serve as a very powerful marketing tool that can help companies to attract new investments and strengthen the loyalty of existing consumers.
Innovative startups and B Corporations represent the future: one striving toward a more technological world and the other toward a more sustainable one. Success moving forward will be all about taking the best of both worlds!