Consumers and businesses over the last several years have become more and more interested in businesses making or pushing for a positive social impact. One part of this movement has been the creation of benefit corporations and B Corps. But aren’t they the same thing?
No, benefit corporations and B Corps are often confused with each other but they are not the same thing. Benefit corporations are a legal entity type – specifically, a type of corporation. The term “B Corp” on the other hand refers to a company that has received the B Corp certification from the nonprofit B Lab.
Benefit corporations are a legal entity type allowed in states with benefit corporation legislation. The movement pushing for benefit corporations was started by B Lab in response to companies seeking legal protection for putting a social or environmental mission on par with (or ahead of) a profit mission. As of this article, benefit corporation legislation has been passed in 34 states and DC with 6 more states considering legislation.
Because benefit corporation legislation differs in each state, there are different requirements depending on where a benefit corporation is formed. However, all benefit corporations have some general differences from regular for-profit corporations.
Benefit corporations must have a public benefit purpose they are pursuing. The public benefit purpose can be social or environmental and depending on the state they may have to have a general or specific purpose or both. As an example, California defines general purpose as “a material positive impact on society and the environment, taken as a whole, as assessed against a third-party standard, from the business and operations of a benefit corporation.”
Specific purposes are more focused benefits for society or the environment. For example, Patagonia has six specific public benefit purposes: 1% for the planet, build the best product and cause no unnecessary harm to the planet or its inhabitants, conduct operations causing no unnecessary harm, sharing best practices with other companies, transparency, and providing a supportive work environment. Kickstarter has 3 specific public benefit purposes: always support art and artists, operate with a corporate code of conduct, and donate 5% of post-tax profits to arts education and organizations fighting inequality.
Being a benefit corporation allows the company to legally take into account other stakeholders’ interests beyond just shareholders’ interests in maximizing profits. For example, Delaware’s code says that directors must balance stockholder’s interests, the interests of those materially affected by the corporation, and the public benefit(s) of the company. California’s code says that directors must consider the shareholders, employees, customers, community and society, local and global environment, company’s interests, and the company’s ability to accomplish its public benefit purpose.
Benefit corporations are also required to create a report to show their progress in fulfilling their public benefit purpose. Most states (notably excluding Delaware) require benefit corporations to use a third-party standard (i.e. a standard developed by an organization that meets a state’s requirement for independence and transparency) to review their progress or require companies to make their report available to the public. Benefit corporations are also required to give a report to their shareholders showing their progress in carrying out their public benefit purpose.
In order to enforce the company’s public benefit purpose, shareholders can sue the company for not fulfilling or pursuing its purpose. However, Non-shareholders, including the ultimate stakeholders who are targeted by the benefit corporation’s purpose, cannot sue the company for failing to fulfill or pursue its purpose.
B Corps are companies certified by B Lab to show that they have met certain standards for social and environmental performance. B Lab says that “B Corp is to business what Fair Trade certification is to coffee or USDA Organic certification is to milk.” Any company can be certified as a B Corp as long as they follow and meet B Lab’s 3 steps: 1) “Meet Performance Requirement;” 2) “Meet Legal Requirement;” and 3) “Make it Official.”
1) Meet Performance Requirement
The performance requirement just means that B Lab assesses the company’s social and environmental impact by using its B Impact Assessment. The assessment tailors questions about governance, workers, community, and environment to a company’s size, industry, and location. These might be questions such as “What % of management is from underrepresented populations?” or “Has the Company worked within its industry to develop social and environmental standards for your industry?” In order to pass the first step, the company needs to score at least 80 on a 200 point scale.
2) Meet Legal Requirement
The next step, to meet the legal requirement, allows B Lab to ensure that the company will make itself responsible for all of it stakeholders rather than just the shareholders by having the company add language to its governing documents. Each company’s legal requirement will depend on what type of entity it is, such as a corporation or LLC. B Lab gives a general list of 4 types of entities and fits all other entity forms into these categories: corporations, LLCs, benefit corporations, and sole proprietor.
As a Corporation
B Lab includes C Corps, S Corps, for-profit cooperatives, and social purpose corporations within corporations. See here for more. The legal requirements for corporations varies on the state it was formed in. Generally speaking, corporations formed in a state with benefit corporation legislation need to convert to a benefit corporation (or incorporate as a benefit corporation) to meet B Lab’s second step. Those corporations formed in a state without benefit corporation legislation will either have to add additional language required by B Lab into their governing documents or into the B Lab Term Agreement form. There are some exceptions to this for companies that are social purpose corporations or for companies that are formed in states that allow social purpose corporations or specific benefit corporations. See here for more details.
As an LLC
Under LLCs, B Lab includes LLPs, LPs, and more. The legal requirement is different for those entities that B Lab considers LLCs. Here, the companies seeking B Lab certification need to amend their governing documents and add B Lab’s additional language. B Lab gives LLCs a 90 day window to complete this requirement after certification.
As a Benefit Corporation
If the company is a benefit corporation then it already meets the legal requirement and doesn’t need to do anything else. B Lab will, however, ask for the companies governing documents for review before granting certification.
As a Sole Proprietor
If the company is a sole proprietor then B Lab has no legal requirements and allows the company to move to the third step.
3) Make it Official
B Lab’s last step is to have the company seeking certification sign the B Corp Declaration of Interdependence and B Corp Agreement. In order to maintain its certification, the company must be reassessed every two years and must pay an annual certification fee based on the company’s annual sales. See here for more information.
DISCLAIMER: The information in this article is provided for informational purposes only and should not be construed or relied upon as legal advice. This article may constitute attorney advertising under applicable state laws.