“B” In the Know: How Benefit Corporation Legislation is Changing the Business Landscape

Since 2010, 26 states and the District of Columbia have passed legislation as to the formation and operation of a benefit corporation, a hybrid corporate form that straddles the line between a traditional for-profit corporation and a charitable organization.

Historically, profit has been the primary metric by which corporate officers have been held accountable to their shareholders. Since the late 20th century, however, the world has seen the rise of a new type of business owner: the social entrepreneur. Profit, people, and planet are the metrics used by the social entrepreneur to measure success, commonly referred to as the triple bottom line.

The social entrepreneur faces two challenges. First, how does a social entrepreneur differentiate her business from a traditional, profit-centric corporation that is merely appropriating terms like green and sustainable as a marketing strategy? Second, how can a social entrepreneur employ the triple bottom line approach without running afoul of her duty to maximize shareholder value?

B Lab, a nonprofit organization founded in 2006 to support social entrepreneurs, has provided solutions to both of these challenges: B corporation certification and model benefit corporation legislation.

This article further defines the terms benefit corporation and certified B Corp, compares benefit corporations to other business entities, and describes some of the pros and cons of running your business as a benefit corporation or certified B Corp.

Terminology

Benefit Corporation versus Certified B Corp

While the terms benefit corporation and B Corp are sometimes used interchangeably, they are actually two distinct concepts:

  • A benefit corporation is a legal status granted by state law that requires the corporation to have a purpose of creating a general public benefit: a measurable positive impact on society and the environment. State law further requires that the general public benefit be measured against a third-party standard adopted by the benefit corporation.
  • A certified B Corp is a business entity that satisfies the social and environmental performance, accountability, and transparency standards set forth by the nonprofit B Lab. The certification provides an objective standard for socially conscious firms to differentiate their corporate governance practices from traditional corporations. This is similar to the Fair Trade and LEED designations, which serve as benchmarks for trade practices and building environmental impact, respectively.
  • A benefit corporation need not be a certified B Corp in order to obtain benefit corporation status under state law. Conversely, a corporation may obtain B Corp certification from B Lab without being a benefit corporation under state law. However, B Lab’s B Corp certification would serve as an independent third-party standard by which a benefit corporation could gauge whether it has satisfied its general public benefit requirement.

B Corp versus C Corporations and S Corporations

While C corporations and S corporations derive their names from subchapter C and subchapter S of chapter 1 of the Internal Revenue Code, certified B Corps derive their name from the benefit they hope to provide to society and the environment. For tax purposes, B Corps and benefit corporations may be classified as either C corporations or S corporations or partnerships, and do not currently receive special tax treatment under state or federal law (although they may receive tax benefits, such as alternative energy credits, incidental to their particular business operations). The difference between these entities and traditional C or S corporations is solely related to how they are governed: B Corps and benefit corporations must consider social and environmental impact in their decision making, whereas traditional corporations need only maximize shareholder value. 

Pros and Cons

Benefit corporations and certified B Corps both have the benefit of attracting investors, customers, and employees concerned with corporate social responsibility. A certified B Corp has the added benefit of differentiating itself from other businesses by using a benchmark for sustainable corporate governance.

Becoming a benefit corporation under state law obligates the business to operate in a manner that benefits society and the environment. An officer of a benefit corporation has a much broader, subjective standard to follow than an officer in a traditional corporation. Additionally, the fact that not all states have benefit corporation laws adds complexity to interstate business transactions and changes in ownership.