Making a Difference (and a Profit): Advantages and Disadvantages of Forming or Converting into a “B” Entity
April 30, 2018
Authored by: Aaron Ginsburg
With the creation of “B” Entities, businesses no longer need to choose between shareholder value and social impact. Under traditional corporate structures, directors have a fiduciary duty to maximize corporate profits and “shareholder value,” which can drive companies to focus more on short-term earnings than their communities and the environment. “B” Entities, on the other hand, refer to a corporate structure or private certification that requires directors to consider the social and environmental impact of their decisions in addition to the shareholders’ pecuniary interests. “B” Entities can therefore be compelling for new businesses seeking to prioritize social good or for existing companies trying to demonstrate a commitment to running a sustainable, socially responsible business.
There are two types of “B” Entities: “Benefit Corporations” and “Certified B Corporations.” A company can be a Benefit Corporation or a Certified B Corporation or both.
A Benefit Corporation (also known in some states as a “Public Benefit Corporation” or “PBC”) is a legal incorporating structure conferred by State law similar to a C-Corp, partnership, or LLC. Unlike those other entities, however, a Benefit Corporation must consider the impact of its business decisions on the general public – not just shareholders – while creating a material positive impact on society and the environment.
Certified B Corporations or “B Corps” are for-profit companies certified by B Lab, a nonprofit organization headquartered near Wayne, Pennsylvania, which meet B Lab’s rigorous standards of social and environmental performance, accountability, and transparency. Obtaining a B certification is the functional equivalent of meeting the standards needed for the Rainforest Alliance, LEED, or Fair Trade labels. According to B Lab’s website, “B Corp is to business what Fair Trade certification is to coffee or USDA Organic certification is to milk.” Because this is an independent third party certification, there is no direct legal effect to becoming a Certified B Corporation; however, the certification is generally considered to help businesses establish goodwill with their employees, customers, and community.
As described in greater detail below, there are certain advantages and disadvantages of becoming a “B” Entity. Depending on a variety of factors – including the company’s mission, profit objectives, and shareholders’ values – companies may want to consider one or both of these business models.
Advantages: Benefit Corporations afford legal protection to companies that prioritize social and environmental values over shareholder returns. In other words, Benefit Corporation status allows directors and officers to balance financial and non-financial interests when making business decisions. In contrast, such considerations could lead to liability under traditional corporate law. There are also a number of business reasons to become a Benefit Corporation, such as improving brand image, attracting talent and impact investment capital, and partnering with other like-minded businesses and organizations. For those reasons, Benefit Corporations expressly state their public benefit purpose in their governing documents and marketing materials. For example, Kickstarter – which converted from a C-Corp to a PBC in 2015 – has as its stated mission to “help bring creative projects to life.” As stated on its website, Kickstarter measures “success as a company by how well we achieve that mission, not by the size of our profits.” Among other benefits, promoting that policy has helped Kickstarter attract significantly more talent and emphasize the company’s impact-oriented operational policies.
Disadvantages: When making decisions, the directors and officers of a Benefit Corporation are requiredto consider the impact on not only their shareholders, but also non-financial interests, such as the community, the local and global environment, and the company’s employees, suppliers and customers. Such considerations could create a threat to near-term shareholder profit. Moreover, a company’s failure to pursue its stated public benefit mission could expose directors, officers, and the company itself to claims for monetary damages (i.e., for breach of fiduciary duties) or injunctive relief under statutory “benefit enforcement proceedings.” These proceedings, which can be brought directly by the Benefit Corporation or derivatively through its shareholders (or other persons provided by statute), hold the corporation and management accountable for creating the intended public benefit.
Tax Consequences: A Benefit Corporation receives no special tax benefits. Just like traditional for-profit corporations, a Benefit Corporation may elect to have its earnings taxed at the corporate level (like a C-Corp) or to pass through earnings directly to shareholders who will be taxed at the individual level (like an S-Corp).
Other Requirements: The procedure for incorporating a Benefit Corporation is the same as for a traditional corporation. For example, in California the company must pay a one-time fee and file its Articles of Incorporation with the California Secretary of State, which must include the following statement: “This corporation is a Benefit Corporation.” The company must also comply with California’s Benefit Corporation statute and submit an annual report that discloses the company’s environmental and social impact. The Delaware Secretary of State has similar requirements for companies forming or converting into a Delaware Public Benefit Corporation.
Certified B Corporations
Advantages: B Lab provides access to over 80 service partnerships, allowing Certified B Corporations to enjoy savings and access mission-aligned technology, talent, and expertise. Companies also can use their certification status to attract investors and talent, build credibility and customer loyalty, benchmark performance, and protect their mission. Additional information on the benefits of becoming a Certified B Corporation can be found by visiting B Lab’s website, available here.
Disadvantages: There are annual administrative and legal costs associated with obtaining and maintaining B certification. There also may be a heightened level of scrutiny from activists and shareholders, who may be hypercritical when assessing the organization.
Benefit Corporation Requirement: B Lab requires companies incorporated in certain states, such as Delaware and California, to operate as a Benefit Corporation within two years after becoming certified. Although the process of forming or converting into a Benefit Corporation is generally manageable for private companies, public companies have been more hesitant to make the change. In fact, Etsy (NASDAQ: ETSY), a Delaware corporation, recently announced that it would be giving up its B certification “because converting [into a Benefit Corporation] is a complicated, and untested process for existing public companies.”
Other Requirements: To become certified, a company must successfully complete the B Impact Assessment, which requires paperwork and a score of 80 or higher on a 200 point scale. Companies must also complete a Disclosure Questionnaire that considers information involving “any sensitive practices, fines, and sanctions related to the company or its partners.” In addition, companies must pay an annual fee, re-certify every two years, and include in its articles an express commitment to pursue a material positive impact on society and the environment as a whole. After obtaining certification, companies can use the B circle mark and join the community of over 1,800 Certified B Corporations, including popular consumer brands like Patagonia and Ben & Jerry’s.