To continue where we left off on the July 24th entry about alternate corporate forms, it’s time now to take a closer look at the Benefit (B) Corporation. But first, a crucial distinction to dispel a commonly held myth.
A B Corporation is not the same as a Certified B Corp.
Why are we emphasizing this point? Because the terms are often (incorrectly) used interchangeably, and when discussing a hybrid corporate structure that is already confusing and novel, it’s important to not further add to the misconception. We’ll explain the distinction below.
So first things first…what is a B Corporation?
A B Corporation is a legal status given to a company by the state. It’s an alternative to an LLC, L3C, C Corp, or S Corp. However, like L3Cs, the B Corporation format is not available in all states—to date only 20 states have signed legislation permitting the legal status. Encouragingly though, 18 more states have legislation in the works. Maryland pioneered the legislation in 2010, but the biggest win for B Corporations came in July when Delaware, home to over 50% of the world’s largest corporations, signed B Corporations into state law.
There are 3 defining characteristics of a B Corporation:
1. It must create a positive social or environmental impact on society.
2. The shareholders’ fiduciary duty is broadened to include maximizing the company’s social impact as well as profits.
3. It must use an independent third party to assess and report social and environmental impact.
What are the advantages?
1. Broadened Fiduciary Duty for Shareholders
B Corporation legislation requires all corporate shareholders to make decisions that integrate all of the company’s bottom lines. Why is this important? This requirement allows corporate leadership to make decisions that allow them to pursue a social mission, whereas before the entity could have been sued for failing to prioritize profit maximization. This is the main draw for entrepreneurs interested in focusing on a social bottom line, and is what makes the B Corporation so revolutionary.
2. Connecting with Consumers and Clients
In an age when whitewashing and greenwashing are ever prevalent, incorporating as a B Corporation is a way for companies to truly stand out as adhering to ethical principles. Many socially conscious consumers will more easily connect with a brand that puts social and environmental issues on the same pedestal as profits, and so this legal status can serve as a very effective marketing tool.
3. Being Part of a Movement
Most B Corporations to date are run by very passionate individuals who believe that business can be a force for social change. And since the legislation is only 3 years old, these business owners are seen as pioneers in the alternate corporate entity ecosystem. Incorporating as a B Corporation ensures instant access into a network of individuals united by a common purpose.
What are the disadvantages?
1. Smaller Pool of Investors
Since B Corporation shareholders are legally obligated to make decisions that benefit both society and the bottom line, a B Corp entrepreneur will not likely capture the interest of investors looking only for a maximum financial return. But, there is an opportunity to attract capital from investors who are looking further than a single bottom line. Luckily, these so-called “Impact Investors” are growing in number and are looking to fund companies that make a difference in society.
2. No Federal Tax Benefits
At this point in time, the IRS does not award any special tax status to a B Corporation, and so the company must choose to be taxed either as a C or S Corp. While the lack of federal tax benefits is not a disadvantage over other traditional corporate forms, it is unfortunate in that it offers no additional incentive for entrepreneurs seeking the alternate status.
3. New Concept
Because B Corporation status is so new, many lawyers and other service providers are unfamiliar with the nuances of the legislation. This may require a great deal of self-education on the part of the entrepreneur in order to completely understand the implications of business decisions. It is rather difficult to obtain an exact number, or even a reasonable estimate, of the total number of B Corporations in existence today because states often fail to differentiate B Corps from C or S Corps when recording incorporation. However, very rough estimates number these companies in the 250-300 range. Despite the small number of companies to date, strong voices have emerged as advocate for the legislation—well-known Patagonia switched its corporate structure to a B Corp in California on the very first day it was eligible.
Ok, so then what is a Certified B Corp?
A Certified B Corp is a company that has been given a certification by the nonprofit B Lab. B Lab conducts an impact assessment to see if a company meets rigorous social, environmental, and accountability standards before assigning the B Corp stamp of approval. The idea is that companies that use the “power of business to solve social and environmental problems” should stand out in some ways from their non mission-driven competitors, and stand together to make a statement about what business could look like.
It is important to note that a Certified B Corp is not a legal status. Most of these companies are traditional LLCs or C Corps. While some do have both the B Corp certification and the B Corporation legal status, it is not a mandatory prerequisite for eligibility. Evaluation criteria include corporate recycling practices, employee diversity, and community engagement, and each company is graded on a 200 point scale. Certified B Corps range wildly in size, including young startups like B’More Organic, as well as established players such as Ben & Jerry’s.
Choosing to become a Benefit Corporation or to certify as a B Corp is about joining a movement of business owners who strongly believe that you can do well while doing good, and we at EMH are encouraged that Louisiana is at the forefront of providing corporate choice. However, there is still a long way to go. While there are 830 Certified B Corporations, there are fewer than 300 actually incorporated as Benefit Corporations nation-wide. Also, metrics for assessing social impact are still far too company-specific to be applied as industry standards. Nonetheless, Benefit Corporations represent an early effort at addressing the growing demand by investors and consumers for socially conscious businesses. While C and S Corps are surely here to stay, Benefit Corporations are emerging as a force to be reckoned with.
To learn more about alternate corporate forms, please reach out to us at firstname.lastname@example.org.
Please note that EMH is not providing tax advice. You should consult your CPA to determine if this business form could be appropriate for you.