OpenAI wants to create a public benefit corporation. What does that mean?

AFTER months of back-and-forth with regulators and stakeholders, OpenAI said it is getting closer to converting into a more traditional, for-profit company – a key step in its bid to secure billions more in capital to build cutting-edge artificial intelligence (AI) products. 

As part of the restructuring, the ChatGPT owner intends to form a “public benefit corporation” (PBC) that is meant to be more appealing to investors. The overall business would continue to be overseen by OpenAI’s nonprofit entity, which would receive an equity stake of more than US$100 billion in the new corporation. 

OpenAI has faced pushback from former employees, academics and rivals, including Elon Musk, who raised concerns about the company prioritising profits over safe AI development. The PBC approach is an attempt to strike a complicated balance that would ease those fears. 

So what is a PBC, and how would the status change affect OpenAI’s operations?

What is a public benefit corporation? 

The designation was created under Delaware law and allows profit-making entities to pursue parallel goals to do with bettering society.

Directors and managers of PBCs must balance the interests of shareholders against the interests of those “materially affected by the corporation’s conduct” and public benefits identified in the company’s charter.

Directors have no obligation to prioritise one set of interests over another. 

Why set up a PBC?

Because a PBC structure gives companies the freedom to pursue social and financial goals in parallel.

That could allow a company to more easily fund its heavy investments, while still taking a stand against investors lobbying for the company to depart from its social mission and prioritise higher financial returns. 

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How does this compare to OpenAI’s current structure? 

OpenAI currently operates under a hybrid structure in which OpenAI Inc is a nonprofit and OpenAI LLC, of which software giant Microsoft is a minority owner, serves as its for-profit subsidiary.

This structure includes a “capped-profit” model, in which investors agree to limit their maximum financial returns while adhering to the nonprofit’s charitable goals. 

Under the revised plan, OpenAI would convert the for-profit into a PBC and remove the cap on financial returns, a move that is likely to appeal to current and future backers – even as the nonprofit entity remains in control.

“As we were looking at various options, we definitely wanted something that works for investors, or at least works well enough for investors that they’re happy to continue to fund us to the degree we think we will need,” OpenAI CEO Sam Altman said on a call with reporters in May. 

The governance structure remains a work in progress, however.

Under the new plan, the nonprofit will have a separate board from the for-profit, but both will initially comprise the nonprofit’s current directors. Over time, the nonprofit will be able to select board members for the for-profit.

But it is still being determined whether the nonprofit will be able to fire OpenAI’s for-profit directors or executives, Bloomberg News has reported, citing a person familiar with the matter. That is a crucial detail, given that it was a prior incarnation of the nonprofit board that briefly ousted Altman as CEO in 2023.  

What are the drawbacks of a PBC?

PBCs are not required to use any independent standards to evaluate compliance with their social or environmental goals, so it can lead to accusations of “ethics washing”.

This is a sensitive topic for OpenAI, which is under conflicting pressures to balance its goal of building “safe and beneficial artificial intelligence for the benefit of humanity” while still making a return on its heavy investments in computing capacity. 

PBCs are a fairly new type of legal entity, so it is unclear how courts will interpret and measure the mandates of increasing both profits and social goods when it comes to OpenAI. Only shareholders with at least 2 per cent of the company’s shares can sue the company if it does not uphold its commitment to be of public benefit. 

Who else operates as a PBC?

The structure has been popular among emerging AI companies whose managers want to earn a profit, while responding to public concerns that the technology poses a threat to humanity.

Anthropic, an AI company formed in 2021 as a PBC, has a public mission to “build reliable, interpretable, and steerable AI systems”. Musk’s xAI is also a PBC. 

Other prominent examples of PBCs outside of the tech industry are shoe brand Allbirds and eyewear company Warby Parker. But OpenAI’s approach differs, given the continued power of its nonprofit. 

What steps are left before OpenAI completes its restructuring?

OpenAI and Microsoft have been holding talks for months about reshaping their relationship, in part to secure Microsoft’s assent for the restructuring of the startup.

In September, the companies announced they had signed a “non-binding memorandum of understanding, or MOU, for the next phase of our partnership”. They also said they are “actively working to finalize contractual terms in a definitive agreement.”

Gaining Microsoft’s buy-in is not the only hurdle to OpenAI’s attempts to restructure.

California Attorney-General Rob Bonta and Delaware Attorney-General Kathy Jennings are currently reviewing the company’s proposed financial and governance changes. In September, their offices released a joint letter to OpenAI’s board raising concerns about recent reports of how OpenAI’s products interact with children, including one Californian who Bonta said died by suicide after interacting with a chatbot.

OpenAI is also facing opposition to its restructuring from Musk, an early backer who split with the company and accused the startup of defrauding investors about its commitment to its charitable mission in an active lawsuit. OpenAI has pushed back on Musk’s claims and said the billionaire is trying to slow it down.