To B or not to B…
With apologies to Shakespeare, that is the question (and where the confusion starts) for many business leaders considering the choice of becoming a certified B Corp or a Benefit Corporation.
While this article focuses primarily on Benefit Corporations, you can’t talk about one of the leading business models for social impact without distinguishing it from one the other “B” – so that’s where we’ll start.
And “B” forewarned – we’re going kind of deep on this one, wonky deep. But don’t worry – we’ll hold your hand and try to have fun along the way. And it will absolutely B worth the dive. (Okay, last B pun, we promise.)
Benefit Corporations and B Corps are like Kissing Cousins
The first thing to understand is this: The two resemble close relatives, call them kissing cousins if you’d like, but they are very different animals.
The confusion, for many reasons, is understandable. Much of this mess centers around use of the term B Corp as interchangeable between the two. Consider this from the legal website Upcounsel:
“In a B Corp (in) Washington State, also known as a B Corporation, the organization is concerned about doing more than creating value for its shareholders. B Corps aim to have a positive impact on greater society.”
They’re talking about Benefit Corporations, not B Corps – but they and so many others don’t understand the difference. Benefit Corporations are not B Corps. That latter designation is reserved for a certification program run by the nonprofit B Lab. (So many B’s – no wonder it’s befuddling.) To become certified as a B Corporation, aka B Corp, companies go through a voluntary and rigorous assessment of their environmental and social policies and practices. If your company clears a threshold score of 80 points out of 200 (a traditional business averages a score of 60), you become certified as a B Corporation. Any company, including LLCs and solopreneuers, can qualify for this certification.
So as your brain begins to catalog this distinction, just think of a B Corp like a Fair-Trade product certification, but for a company. Got that?
A Legal Structure to Ensure the Ability to Create Social and Environmental Impact
A Benefit Corporation is a legal status that is embedded in your corporate governance. It provides for-profit companies with the flexibility to pursue social impact alongside financial results without legal threat from investors for not maximizing shareholder value.
This designation can also help preserve your social mission as your company advances into the future with potentially different leadership and ownership. One state in particular has actively addressed this in its statute: Connecticut is the first state to allow for a “preservation clause,” which a company can elect to keep it from reverting to a “for-profit-only” entity in the future.
While the design of a Benefit Corporation gives you the flexibility to pursue these public-oriented outcomes, it also comes with a new responsibility—you will be legally required to demonstrate the specific public benefits you are creating.
(We interrupt previously scheduled programming with an important message: This legal status goes by slightly different names in different states. In California, it’s a Benefit Corporation. In Oregon, it’s a Benefit Company. In Delaware, it’s a Public Benefit Corporation (PBC). California and Washington state have corporate forms in addition to Benefit Corporations that are called “Social Purpose Corporations,” which are again, relatives of Benefit Corporations, but generally less stringent in their requirements. So, yes – confusion runs amuck, which, dear reader, we hope to clear up for you by article’s end. For purposes of consistency, and because Google Trends indicates it shows up most frequently as a search term (Hello SEO!), we are referring to them as Benefit Corporations.)
To become a Benefit Corporation, you must be a C or S corporation – although five states (Delaware, Illinois, Maryland, Oregon, and Pennsylvania) allow LLCs to declare this status as well. You file to become a Benefit Corporation through your Secretary of State’s office, and the legal requirements of this corporate form are inserted into your company’s articles of incorporation and by-laws. You’ll retain your C or S corporation for tax purposes.
The following three general requirements of a Benefit Corporation are fairly consistent from state to state:
- The company must claim and create a specific public benefit to stakeholders beyond shareholders.
- It will provide shareholders with an annual benefit report detailing the ways it pursued and delivered a public benefit—and publish the annual report on the public portion of its website.
- It must use a third-party standard to assess its social or environmental performance in pursuit of its stated public benefit.
Let’s add some context to each of those elements.
Stakeholders:
Directors are required to consider the corporation’s actions on all stakeholders, but generally with an emphasis on a specific public benefit. Stakeholders can be defined differently by the various benefit corporation statutes that have been passed, but usually include employees, customers, the local community, the environment, and yes – shareholders. Companies can also choose to go narrower in identifying their public benefit, say targeting something as specific as gender equality or Latinx entrepreneurs, for example.
Annual report:
Each year (in most states) the company needs to produce an annual benefit report, often called an “impact report,” 180 days after the end of its financial year. (In fact, the Unit Co platform for measuring and reporting was inspired in part by this requirement.) Benefit Corporations typically must send the annual report to their shareholders and post it on a public section of their website. Enforcement of this provision could be improved; only three states require Benefit Corporations to file their annual reports with the Secretary of State: New Jersey, Minnesota, and New Hampshire. Both New Jersey and New Hampshire can dissolve a Benefit Corporation if it’s determined the company has not made its annual report available.
Third-party standard:
You must use a third-party standard to measure the public benefit you are creating and provide an objective framework to understand the impact you are achieving. Most state statutes don’t provide acceptable standards, though Oregon offers a helpful list of four standards for its Benefit Corporations: Green America, Benefit Corporations for Good, B Lab – B Impact Assessment (BIA), and The Global Reporting Initiative, GRI. B Lab, which developed the model legislation for Benefit Corporations—also offers guidance for selecting standards on its website.
It’s important to note that Delaware, the home of corporate law in the U.S as well as home to the majority of Benefit Corporations in this country, does not require a third-party standard and makes the annual report requirement optional.
The bottom line: Pay attention! There are nuances and small differences from state to state and you (or counsel) should be well-versed in yours.
Can a B Corp also be a Benefit Corporation?
And the answer is – cue the confusion – yes! A recent change to the B Corp certification process requires that companies with fewer than 50 employees become a Benefit Corporation (or legal equivalent) prior to certification if they operate in a state with this legal status. Companies with more than 50 employees have two years after certification to make this transition. Currently, about 16% of B Corps in the U.S. are also Benefit Corporations. You can learn more about these legal requirements here.
Many companies find that choosing the Benefit Corporation model is the easiest on-ramp to formal impact, as the process of electing this legal structure is far less intensive than the perseverance required to go through the B Corp certification process, which currently can take up to a year (or more). This also provides an advantage if your Benefit Corporation chooses to certify as a B Corp at a later date: the B Impact Assessment rewards Benefit Corporations with extra points for adopting this legal structure.
The Benefit Corporation Model is Growing Globally
The first state to approve Benefit Corporation legislation was the “Old Line State” (Maryland, for you young pups out there) in 2010, which just so happens to be where our company, Unit Co, is registered as a Public Benefit Corporation. Shout-out to Big Bad Wolf, a pet shop that became Maryland’s first public benefit corporation and thus the first in the world as well (Woof!). The most recent state to approve Benefit Corporation law was New Mexico in 2020. Today, 37 states, the District of Columbia, and the territory of Puerto Rico have adopted this legislation. And in just over a decade, the community of Benefit Corporations has grown from that cool little pet shop in Maryland to more than 10,000 companies in the U.S.
While many of these 10,000 companies are small and mid-sized businesses, the community also includes well known consumer brands and public companies. The crowdfunding site Kickstarter and Patagonia are Benefit Corporations, as are publicly traded companies, including Laureate Education (the first Benefit Corporation to go public in 2015), Danone (one of the world’s leading food companies, with headquarters in France), Amalgamated Bank, Natura & Co, and Athleta (owned by publicly traded Gap). Lemonade, Coursera, Vital Farms, Broadway Financial Corporation, and Zymergen recently joined this group by going public. And just months ago allbirds, a billion-dollar shoe and apparel company, filed to go public. In a twist befitting a benefit corporation, allbirds calls its IPO an “SPO,” short for a Sustainable Public Equity Offering.
That nod to Danon in the last paragraph should have got you thinking internationally, oui? This model of stakeholder capitalism has broadened beyond the boundaries of the U.S. and is being embraced around the world. Similar legal business structures are now recognized in Italy (2015), Colombia (2018), Ecuador (2019), the province of British Columbia, Canada (2019), France (2020), Peru (2020), Rwanda (2021), and Uruguay (2021).
Reap the Benefits of Becoming a Benefit Corporation
It’s our hope you’re reading this not purely for scholarly pursuit (nothing wrong with that – study away!), but rather because you’re on the path to adopting a social impact business model and using your company’s talents and resources for societal good. So, if your company is in a state with the option to become a Benefit Corporation, give it due consideration as it’s the best way to enshrine in your governance the ability to benefit stakeholders by creating social and environmental impact. It’s also a powerful declaration to the world about the intent of your company and the difference you intend to make through your business practices. Plus, hey, it feels great to open the door to an uplifting conversation with a prospective new hire, a supplier, or even a neighbor by telling them that your company is a Benefit Corporation. And that, friends, feels pretty good.