BY E. WILKINSON & S. MAZZEO | NOVEMBER 2016
What Is A Benefit Corporation?
The number of business entities available to social entrepreneurs is growing to accommodate the growing industry. For a social entrepreneur it can be difficult to understand what each of the legal entities represent and involve. If you've found yourself wondering what the advantages are to becoming a Benefit Corporation, C Corporation or becoming B certified, you are not alone. We asked two friends, who happen to be lawyers, to break down a few of the rising social good hybrid organizations for social good entrepreneurs and consumers alike.
What are Benefit Corporations?
A business may operate as a “for-profit” or a “not-for-profit” entity. For-profit businesses, often known as C corporations, primarily seek to generate revenue and maximize profit for the corporation’s owners, whether it be a sole proprietor, multiple partners, members or shareholders. Directors of for-profit businesses must use their business judgments to run the company with one purpose only—to maximize shareholder profits, otherwise shareholders may sue directors for breach of their fiduciary duties.
On the other hand, nonprofit organizations serve a social purpose or some “greater good,” and unlike for-profit business executives’ profit maximizing purposes, non-profit executives cannot seek personal profit, and must reinvest any of the organization’s profits back towards its mission.
Until recently, this inflexible legal framework hindered social entrepreneurs desire to make money while furthering a social purpose. In response to this need, several states created a new business entity known as a “benefit corporation.”
Benefit corporations are for profit and not tax exempt entities and generally operate as a traditional C corporation, but unlike C corporations’ sole profit maximizing objective, a benefit corporation must also pursue a “general public benefit.” A benefit corporation is a business with two purposes—to generate revenue and to pursue a social mission. Thus, a B corporation combines features of profit and nonprofit entities and positively impacts society and the environment, even if it sacrifices a profit to do so.
Benefit Corporations and C Corporations Compared
Unlike C corporation directors who risk personal liability for running the company in a way contrary to maximizing shareholder profits, benefit corporation directors are generally immune from shareholder liability for performing their duties, which require them to consider how their decisions will affect their employees, the community and the environment, in addition to their shareholders.
Benefit corporations must file an annual report and show how their performance benefitted social and environmental goals according to a “third party standard.” While this may seem like a hassle, benefit corporations often enjoy a marketing advantage over C corporations because they can market their B Corp. status and social responsibility in a way appealing to many consumers who increasingly consider the ethics and social responsibility of a company when making purchasing decisions.
Benefit Corporations and B Certifications
A registered benefit corporation differs from a certified B corporation. A registered benefit corporation, as we described above, is a business entity created under state law that allows a company to incorporate as a benefit corporation as an alternative to a traditional C corporation.
On the other hand, a business may become a certified benefit corporation after it applies for and receives a voluntary certification from the B Lab—a nonprofit organization dedicated to building a global community of certified B corporations who meet overall high standards of verified, social and environmental performance, public transparency, and legal accountability.
In other words, a B Certification gives a company an additional “seal of approval” for meeting the strictest benefit corporation standards. A B corporation may become certified if it agrees to comply with the B-Lab’s standards and allows the B-Lab to monitor its performance.
Overall, a benefit corporation provides an appealing business model to mission driven and socially conscious businesses as well as impact investors and social entrepreneurs, who may now seek profits with social purpose. Benefit corporations may, however, encounter more transaction costs than C corporations, since they must create an annual report and maintain a certain level of transparency about its ability to meet its social purpose. Benefit corporations allow social entrepreneurs and directors to operate a company for the community and the shareholders, an appealing option in today’s day and age where consumers increasingly support only those socially responsible businesses.
Annual Report Requirement
Each year benefit corporations must create an annual report, make it available on its website and deliver it to its shareholders within 120 days following the end of its fiscal year or at any other time it delivers an annual report to shareholders. The report must indicate how the corporation tried to achieve its “general public benefit” and the extent to which it achieved those benefits and/or a disclosure of any circumstances that hindered the corporation from achieving its public benefits. These efforts must be evaluated by a third party standard that provides a method to define, report, and assess the corporation’s overall social and environmental performance.
The benefit corporation must hire an independent entity to develop the third party standard and the entity must determine the appropriate expertise to assess the corporation’s performance using a multi-stakeholder approach. The independent entity cannot have a material financial relationship with the benefit corporation and no more than one-third of the entity’s members may be representatives of associations of businesses operating within an industry whose performance is measured by the standard, businesses or associations within the same industry or businesses whose performance is assessed against the standard. The corporation must make publicly available the criteria used to measure its overall social and environmental performance and the relative weight given to each criteria, so that all interested parties may access and evaluate the preparation and content of the corporation’s third party standard and annual report. See King Arthur Flour’s 2014 Annual Report and Alter Eco’s 2015 Annual Report as examples. The annual benefit report may seem like a lot of work, but the marketability of benefit corporation status, combined with the public credibility as a socially conscious business will likely outweigh these transaction costs.