Determining which entity structure to use to organize your business is an important first step for any start-up. If you are a socially conscious or environmentally minded entrepreneur, consider a benefit corporation, sometimes called a “B Corp,” which offers an avenue for forming a legal entity to achieve social benefits as well as profits.
A traditional business corporation’s purpose is to maximize financial gain for its shareholders. While many companies seek to benefit the community in which they do business, fundamentally they are still formed to make a profit and thus do not fit the mold of a traditional non-profit organization. The benefit corporation structure combines aspects of the for-profit corporation and non-profit intentions and allows a company to pursue for-profit business goals at the same time as it pursues its identified social mission or public benefits.
The terms “benefit corporation” and “B Corp” are often used interchangeably, but there are important differences between the two. The benefit corporation is a legal entity recognized under a state’s corporate laws, while the B Corp (also known as a Certified B Corporation) is a certification conferred upon a company by a certifying organization. Many states, including Delaware, have adopted laws allowing the formation of benefit corporations.
The Benefit Corporation
A benefit corporation is a for-profit entity, legislatively recognized by more than thirty U.S. states and the District of Columbia, which includes as its legally defined goals, in addition to profit, creating a general positive impact on society, workers, the community and the environment. The benefit corporation laws expand the fiduciary duty of directors to require them to consider non-financial interests when making decisions, as opposed to the narrower fiduciary duties of a for-profit board, which generally require directors to act in the best interest of shareholders.
Benefit corporations are subject to transparency provisions and are required to publish annual benefit reports of their social and environmental performance using a comprehensive, credible, independent and transparent third-party standard. (Note that in Delaware, this report does not need to be released to the public or use a third-party standard as an assessment tool although it is considered a best practice to do both.) In certain states, benefit corporations must file these reports with the Secretary of State. Furthermore, in certain states, shareholders of benefit corporations have a private right of action, called a benefit enforcement proceeding, to enforce the company’s mission when the business has failed to pursue or create general public benefit.
A corporation must elect to be a benefit corporation in its articles or certificate of incorporation, either when the company is formed or by later amendment. Benefit corporations are subject to the same taxation provisions as traditional C Corporations. Generally, benefit corporation stock certificates must contain conspicuous language of the face of each stock certificate stating that the company is a benefit corporation.
The Certified B Corporation
While a benefit corporation is a legally recognized entity, Certified B Corporations (each, a “B Corp”) have no particular legal status. Although many B Corps are benefit corporations incorporated under state law, any for-profit business regardless of corporate structure, state or country of incorporation can become a certified B Corp. B Corp certification (also known as a B lab certification or B corporation certificate) is a private certification issued to for-profit companies by B Lab, a global non-profit organization. The B Corp certification is much like the “fair trade” identification for coffee, “organic” label for food products, or “LEED” certification for green buildings. To become certified, companies must meet a minimum bar of overall social and environmental performance, which is achieved by earning a minimum, verified score on the B Impact Assessment, an analysis of a company’s impact on its workers, community and the environment. The B Impact Assessment is updated every two years, and each company must recertify biennially on the updated standards. In addition, certified B Corps pay an annual certification fee based on their revenues (ranging from $500 to $50,000).
B Corps are subject to similar transparency requirements as benefit corporations and are required to make the results of their assessment transparent by publishing their B Impact report on bcorporation.net. The B Corp certification process also imposes a legal requirement to expand fiduciary duty to the greatest extent possible within existing law to give legal protections to directors to consider nonfinancial interests when making decisions and to provide for additional rights for shareholders to hold directors accountable to consider those interests.
What are the Benefits of Benefit Corporations?
Organizing a start-up company as a benefit corporation allows a company to distinguish itself as a business with a social conscience and offers a business many advantages, including the following:
- Protection for the Company and Reduced Director Liability. Benefit corporation status provides directors and officers with legal protections to consider non-financial interests in making decisions without violating fiduciary duties. In addition, the company is protected from shareholder suits claiming that the company’s management is focused on considerations other than maximizing profits.
- Expanded shareholder rights. The mission of a benefit corporation is woven into the formation documents of the company. Shareholders of a benefit corporation have additional rights of action to hold a company accountable to its mission in the future.
- Attractiveness to Consumers and Investors. Start-ups can use social responsibility as a competitive advantage to draw in investors and consumers who are attracted to a company with increased legal protections, accountability and transparency around its mission.
- Advantage in Retaining Talent. Benefit corporation status gives prospective employees confidence that a company is legally committed to its mission. Benefit corporations such as Patagonia are the forefront of a growing move of high-profit, highly-respected companies where employees—especially young ones—are motivated and driven by the company’s larger purpose and social goals.