This article is part of our “Business Startup Guide” – a curated list of our articles that will get you up and running in no time!
I recently wrote a post on social enterprise, discussing what it entails, and what some of the legal structure options are for a business when the focus is on a social mission. The benefit corporation option is one such legal structure. It’s a fairly new structure, with the first one of its kind coming into existence in 2010, but since then it has rapidly taken off. Now, you can create a benefit corporation in: Arkansas, California, Colorado, Delaware, Florida, Hawaii, Illinois, Louisiana, Maryland, Massachusetts, New Jersey, New York, Oregon, Pennsylvania, Rhode Island, South Carolina, Vermont, Virginia, and Washington D.C., with many more states in the pending legislation phase. In this article, you’ll learn:
- What defines a benefit corporation
- B corp certification: What’s the difference between being a benefit corporation and being B corp certified?
- Benefit corporation pros and cons
So, what exactly is a benefit corporation?
A benefit corporation is a legal structure for a business, similar to an L3C or LLC. The basic idea behind a benefit corporation is that it is a for-profit, non-tax exempt entity, that is legally able to emphasize its stated social or environmental goals ahead of maximizing profits for shareholders. It then protects this idea further by stating that in a benefit corporation scenario, fiduciary responsibility includes the creation of “general public benefit,” so those who would choose a narrow or shallow cause as a means to get the status associated with being a social enterprise are denied that avenue. In addition, benefit corporations are required to make a publicly available record of their performance as compared to a third party standard, so it’s clear that their mission is being served through measurable outcomes. Proponents of the benefit corporation feel that it lends legal protection to their missions, while working for cultural change in support of socially and environmentally responsible business. Benefitcorp.net offers this insight:
“Despite the existence of the business judgment rule governing operating decisions, most directors and officers and many attorneys believe that their options are constrained to acting only in the financial interests of shareholders. The belief that “the social responsibility of business is to increase profits” has been absorbed into U.S. corporate culture and impacts how decisions are made. What is perceived as a legal impediment is often just a cultural impediment. This impediment can be removed by creating a new corporate form explicitly required to take multiple interests into consideration when making decisions.”
Patagonia, the outdoor wear company, was the first company in California to register as a benefit corporation. Founder Yvon Chouinard has been open about his support of the idea, stating that he feels the benefit corporation legal structure protects a company’s founding values into the future, as it allows a company to be mission-focused through succession and changes in ownership. This is important because within a benefit corporation, expanding the concept of fiduciary duty to include consideration of public benefit and social and environmental interest applies in liquidity and sales scenarios as well.
Benefit corporations and B corp certification: What’s the difference?
B corp certified means that a regular for-profit business such as an LLC has gone through the certification process administered by B lab, an international nonprofit based in the United States, established to demonstrate that a business has a social and/or environmental focus. A benefit corporation is the actual legal structure of a business, stating it is required to make a measurable benefit to society in addition to its responsibilities to shareholders. You can certainly be both a benefit corporation and B corp certified.
B corp certification: How it works
B corps are corporations that are traditional for-profit businesses, but have elected to go through a certification process administered by the independent third party nonprofit B Lab, to be able to publicly demonstrate that their business is focused on a social mission. You can view the steps of the certification process here, but a general overview is that you file an impact assessment and receive a rating from B lab, make sure you are fulfilling the appropriate legal requirements (which vary by state, country and—if you’re not a startup—existing structure), and sign a declaration and term sheet. Certification as a B corp is available globally, and there are currently certified B corps in 34 countries worldwide.
Pros to the benefit corporation structure and process:
This much is clear—a benefit corporation has an obligation to be socially and environmentally useful, creating a positive impact for the public. For many considering or currently operating benefit corporations, this is what it’s all about.
Differentiating yourself publicly:
From a marketing and public relations stand point, being able to say that your business is so responsible and socially-minded that you’ve literally structured it with that focus has a big pull in a marketplace where consumers are looking for fair trade and green products. Other corporations may claim to be green or socially responsible, but becoming a benefit corporation shows the public that you are putting your money where your mouth is. It can also help you attract employees: a recent study from the Intelligence Group found that 64% of millenials (workers age 20 to mid 30s) say they want part of their jobs to be making the world a better place.
Maintaining your mission long term:
Something that is important to a lot of founders and owners of benefit corporations is the idea of sustainability. With a corporate structure that, even in situations of changing ownership or selling the company, mandates that all stakeholders (employees, the environment, the public) are taken into account, you can rest assured that after retirement or death, your company will retain its original mission and integrity.
Some people who form or become benefit corporations are business leaders who want to see cultural change. Proponents believe that business can be a force not just for profits, but also for wide-reaching, truly impactful positive changes to our society and environment; that making money and making a difference are not mutually exclusive. A benefit corporation is a new corporate form that ingrains that idea into the culture of the company, and introduces it into our larger national culture.
Cons to the benefit corporation structure and process:
Because the benefit corporation structure is heavily focused on demonstrable goals, there are high standards for transparency and reporting requirements. Forbes reports that benefit corporations must provide an annual report to shareholders outlining their selection of a third party standard for achievement, how the standard was decided upon and what progress was made. This also must be posted on the company website.
As with anything new, there is some inherent risk in not having a history of demonstrated success with a method. Benefit corporations are gaining in popularity, but they haven’t been road tested over decades of trial and error as many legal structures have, and there isn’t a body of legal precedent to reference. Understandably, that can cause trepidation.
Here are some other Bplans articles on related topics:
Further Recommended Reading:
Bcorporation.net is a very informative site with plenty of details on both benefit corporation legislation and B corp certification.
The Barnabas Effect is a book by Lisa R. Fournier with detailed, guide-style information on starting a benefit corporation and the positive effects they can have on communities.
Do you have any questions about benefit corporations that I haven’t answered here? Let me know in the comments below.