B Corporations, An Alternative for Socially Conscious Entrepreneurs

Entrepreneurs who wish to start a corporation that is strictly for profit may register either a C. Corp or an S. Corp. Should they choose not to register as a corporation they have the option to function as a partnership or limited liability company. Until recently, companies that wished to operate for a public benefit were limited to nonprofit organizations under the 501(c)(3) exemption. Increasingly, however, companies are becoming a hybrid of for profit entities that offer some tangible public benefit. For these companies, some states offer what is called the Benefit Corporation or B-Corp. B-Corps have been around since 2010 when Maryland became the first state to pass B-Corp legislation. While relatively young, B-Corps are more popular than you might think and include many well-known businesses such as Patagonia and Warby Parker. These entities bridge the gap between for profit companies that may sometimes be forced to forego certain social initiatives in favor of increasing profits and nonprofit companies, which are often restricted in their ability to raise capital when they need to grow. For entrepreneurs who want to do both, a B-Corp is an option worth considering.

While this article will focus on the B-Corp and its requirements we should also mention two other entities with similar features. California’s flexible purpose company allows a company to adopt a specific social or environmental goal as opposed to the broader obligations placed on B-Corps. Another option is the low profit limited liability company, the LC3, which can raise money for socially beneficial purposes while making little to no profit.

Three Common Features of B-Corps

The B-Corp is a corporate form created by statute in many states. Three of the most common features of the B-Corp include a stated desire to (i) create a material public benefit (ii) expand the company’s fiduciary duty to require consideration of non-financial interests and (iii) report on its overall societal and environmental impact using third-party standards.

Legal Form and B Lab Certification

B-Corps are divided into two classes, one with legal significance and one with market importance. There is the B-Corp that is created by statute and then those that are certified by the nonprofit group B Lab. It should be noted that the B Lab certification confers no additional legal status on a B-Corp but can be seen as an effective marketing tool as B Lab has an extensive list of issues for companies to comply with before they receive certification. B Lab also independently audits the required annual reports for each company that seeks certification; companies that do not have B Lab certification are not required to have their reports audited by an independent third party.

In addition, companies that receive B Lab certification gain access to the support network provided by B Lab. Members of the B Corp network offer discounted services to other companies within the network. For example, Intuit offers QuickBooks for free to B Corps; Salesforce.com gives them a nonprofit discount. Finally, while the B-Corp legal form is only available in a number of states, the B Lab grants certification to companies in all states so long as they comply with the B Lab certification requirements.

Challenges and Tax implications of B Corp

While the B Corp Certification from the B Law is an attractive option for entrepreneurs looking to form a corporation with a social benefit, the status does not come without its share of challenges. The B Impact Rating System exam administered by the B Lab requires answers to up to 220 questions; more than 900 companies have failed to make the cut since 2007. For companies that do make the cut they are required to amend their corporate governing documents and fill them with state authorities. There is an added annual fee that ranges between $500 and $25,000 depending on the company size. Companies need to recertify every two years. In spite of these strict regulations, you should be reminded that this certification has no legal significance.

As a tax matter, B-Corps pay standard corporate income tax. Some cities, like Philadelphia, offer tax breaks to B-Corps; in Philadelphia up to 25 B Corps per year are eligible for a $4,000 tax break.

Purpose and Requirements

If you are considering a B-Corp here is what you need to know to take advantage of this legal status and some of the attendant benefits: (i) directors and managers of a B-Corp must make an affirmative duty to making a positive material impact on society in addition to increasing shareholder value and (ii) the corporation must state its intention to operate as a Benefit Corporation in its charter. Existing corporations can do this by amendment. In addition to making a written commitment to being a B-Corp, directors will have an affirmative duty to consider the effects any corporate act or decision will have on shareholders, employees, customers, local communities, and the environment.

As discussed above a B-Corp must also file an annual public report outlining the public benefit the corporation created in a given year, the way the corporation created the public benefit, any hindrances the corporation faced in creating the public benefit, and the results of a societal-environmental impact assessment based on recognized third party standards. In some states if a B-Corp intends to change its corporate form it is required to have two thirds of its shareholders vote in favor of the corporate reorganization.

Jurisdictions with B-Corp Legislation

If you are interested in registering a B-Corp the following states have enacted legislation allowing the registration of B-Corps: California, Hawaii, Maryland, Louisiana, New Jersey, New York, South Carolina, Vermont, Virginia and Washington State. Many other states have similar laws up for consideration.

Conclusion

For entrepreneurs who want to start a for profit venture with a social component the B-Corp is a worthy option to consider. The B-Corp is not without its own onerous compliance rules, including the B Lab certification process, but once formed and certification is given, companies can benefit from many benefits that B-Corps share with each other as well as tax breaks that some cities may offer to corporations with B-Corp status.

For more information on any of the topics covered in this article please contact one of our attorneys at contact@rbernardllp.com or visit our website at  www.rbernardllp.com to learn more about our practice. Research and writing assistance for this article was provided by Rachel Gholston. Follow us on Twitter.