Many entrepreneurs today set out to start a business that not only will be a profitable enterprise for its founders and investors but also will be an engine of good for its customers, its suppliers, its employees, its community, and the environment. So, when a mission-driven entrepreneur comes to us asking the typical entity selection questions—should we be a C corp or S corp or LLC or even a 501(c)(3)—there’s another letter to throw into the mix: the “B.” Setting aside the important tax considerations of the alphabet soup, which are beyond the scope of this article, becoming a “B Corp,” “benefit corporation,” or “benefit company” may be the right choice for today’s mission-driven entrepreneur.
The Difference Between a “Benefit Corporation” or “Benefit Company” and a Certified “B Corp”
Benefit Corporation or Benefit Company. The benefit corporation or benefit company is a special type of legal entity designed to require consideration of, and create value for, a broader group of stakeholders and not just shareholders or members. Essentially, a benefit corporation or a benefit company is a traditional corporation or limited liability company that has elected “benefit status” in its articles of incorporation or certificate of organization.[1] Under traditional corporate law principles, a corporation and its directors have a fiduciary duty to make decisions on behalf of a corporation that are in the best interests of its shareholders. Although directors may consider other stakeholder interests (such as employees, communities, or the environment), traditional corporate law would not require such consideration and, in some circumstances, may expose directors to liability if such considerations do not maximize profit or returns to shareholders. Similar principles apply in the LLC context with respect to managers or managing members of an LLC.
The benefit corporation and benefit company fix those problems: a director or manager is required to consider the impact of all corporate or LLC acts on various non-shareholder or non-member interests (such as employees, communities, and the environment), along with shareholder and member interests, and will not be held liable for a breach of fiduciary duty as a result of such considerations.[2] These features, along with the general requirement that every benefit corporation or benefit company must endeavor to have a material positive impact on society and the environment from its operations, taken as a whole, mean a mission-driven entrepreneur can bake his or her desire to be an engine for good into the legal DNA of the business.
Certified B Corps. Although benefit corporations and benefit companies are required to assess their actions in creating public benefit against a credible and independent third-party standard, they are not required to be certified by B Lab, a non-profit certifying body for mission-driven businesses (www.bcorporation.net). B Lab-certified organizations are called “B Corps” and can be any type of legal entity or association that has gone through a special assessment process with B Lab. To obtain certification, the applying entity or association must pass a number of rigorous criteria and meet a high level of social and environmental impact. These criteria could include energy efficiency, employee benefits, social impact, and much more. Although B Corps are not required to be benefit corporations or benefit companies, the applying entity or association may need to take steps to ensure that it either becomes a benefit corporation or benefit company (if permissible under its state law) or otherwise take legal steps to bake its social or environmental mission into its governing documents.
What are the Pros and Cons of a Benefit Corporation or Benefit Company and a Certified B Corp?
Pros. There is an increasing interest in companies that are making a positive social and environmental impact. Investors, employees, and customers may view your company in a more positive light. Either or both of the “B” classifications may enhance your brand and generate more loyalty—and provide authentic credibility in the face of what is often called “greenwashing” (by companies that claim to have social or environmental missions but, in fact, do not or companies that can easily drop their social or environmental initiatives if not the most profitable path). In addition, there is research that shows that over the long term companies that focus on these issues may be more successful. As is often asked, the tax treatment of being a “B” is the same as a traditional C corp, S corp or LLC, as the case may be, but tax benefits of being “B” may be ahead. For example, the City of Philadelphia has been a pioneer in this area by offering the Sustainable Business Tax Credit to companies in the city whose business practices support environmental and human well-being.
Cons. To be a certified B Corp, the business must invest time and resources to go through the lengthy assessment process. To be a benefit corporation or benefit company, the business is required to consider non-shareholder or non-member interests (which may not be the desire of some founders or investors) and it must prepare and publish on its website a report each year describing how the business has met its public benefit purposes (which can be a costly and time-consuming task but also a great marketing channel to generate goodwill).
Summing Up.
Many entrepreneurs want to make a difference and have a positive impact on society, employees, communities, and the environment. While they can take into account these values while forming and growing any business under traditional legal structures to some extent, credibility and commitment to these values may be better served and protected for years to come if the business chooses to be a “B.”
Matt Brinker and Beth Cohen are attorneys at Royer Cooper Cohen Braunfeld LLC (RCCB). Additional information about Royer Cooper Cohen Braunfeld is available at http://www.rccblaw.com.
[1] Pennsylvania first authorized benefit corporations in 2013 (see 15 Pa.C.S §§ 3301 et seq.) and more recently, since February 2017, became one of the few states to authorize benefit companies (see 15 Pa.C.S. §§ 8891 et seq.).
[2] The default fiduciary duties of loyalty and care still apply, but a director or manager would not be liable for a claim that he or she breached such duties by considering non-shareholder interests as required by the benefit corporation or benefit company statute (and, naturally, provided the action does not otherwise constitute self-dealing, willful misconduct, or a knowing violation of law).