By: Jon Avidor
“Brands and consumers will continue to come together to form a more cohesive and fluid business ecosystem….The new era of business is about creating enterprises that work together in tandem to drive commerce that matters.”
– Billee Howard, We-Commerce
Entrepreneurs who seek to harness the power of business and innovation to address and implement solutions to critical social, cultural, and environmental issues are increasingly looking to social enterprise business structures, such as benefit corporations. In her book, We-Commerce: How to Create, Collaborate, and Succeed in the Sharing Economy, creative marketing consultant Billee Howard posits an economy of “we” built on “socialization, sharing, trust, purpose, passion, creativity, and collaboration,” and points to a shift in consumerism as the catalyst for this shift towards purpose-driven commerce. A growing number of innovative businesspeople and founders are foregoing traditional entities like partnerships, business corporations, and limited liability companies, and even not-for-profit corporations, in favor of new models that are designed for socially conscious businesses to commit to more than corporate philanthropy and for charities to pursue commercial activities with fewer restraints.
This article will discuss benefit corporations primarily, as well as social purpose corporations and low-profit limited liability companies, how they are different from traditional business corporations and not-for-profit corporations, and the meaning of the “certified B-Corp” distinction.
A benefit corporation is a for-profit corporate entity, which according to model benefit corporation legislation commentary, “offers entrepreneurs and investors the option to build, and invest in, a business that operates with a corporate purpose broader than maximizing shareholder value and that consciously undertakes a responsibility to maximize the benefits of its operations for all stakeholders, not just shareholders.” Basically, a benefit corporation is a profit generating company that must also consider the impact of its decisions and business practices on its societal stakeholders and the environment, and not solely on its bottom line—referred to as the triple bottom line. Benefit corporations have a stated purpose of creating “general public benefit” and, at its shareholders’ election, one or more specific public benefits as identified in its articles of incorporation. This is a stark contrast from corporations, which exist to maximize shareholder value and whose board of directors could be liable to shareholders for pursuing courses of action that do not enhance corporate profits. See American Law Institute, Principles of Corporate Governance (1994).
Under New York corporate law, a general public benefit is an overall “material positive impact on society and the environment” created by a business and its operations. N.Y. Bus. Corp. § 1702(b). A benefit corporation may also set forth specific public benefits in its Certificate of Incorporation, including, but not limited to, providing goods or services to low-income or underserved individuals or communities, promoting economic opportunity beyond just job creation, protecting the environment, improving health and human services, promoting the arts, sciences, or education, and supporting other benefit corporations. N.Y. Bus. Corp. § 1702(e). California’s first benefit corporation, sustainable outdoor clothier Patagonia, Inc., included six specific benefit purposes in its Articles of Incorporation:
Source: Patagonia, Inc., Annual Benefit Corporation Report (2016)
For benefit corporations, meeting these public benefit commitments become part of the corporate management’s fiduciary duties and one way in which it’s held accountable. For example, under the model benefit corporation legislation, in addition to its regular obligations to shareholders under business corporation law, officers and directors must consider the effects of any action or inaction upon stakeholders, such as employees, subsidiaries, suppliers, customers, the community, and local and global government, as well as the sort and long term interests of the company, in meeting and best serving its beneficial commitments.
On the board of directors of a benefit corporation, a designated “benefit director” ensures compliance with the corporation’s beneficial purposes and preparing the annual compliance statement to shareholders. While a benefit corporation does not have to be accredited or certified under the model benefit corporation legislation, it must publish an annual benefit report to offer transparency between the corporation, its shareholders, and public beneficiaries, which is sent to shareholders, made available on its website, and sent to the Secretary of State of its state of incorporation. These annual reports must include a description of how the company pursued general public benefit and its specific public benefits and whether these benefits materialized or were hindered in some way, the third-party standard by which it defined and evaluated its social and environmental performance and the results of that overall assessment, and information about its directors, including the benefit director, and benefit officer, if any.
A Note on Certified B Corporations™
B Lab is a nonprofit organization that provides all business, not just corporations, with the resources and community to build socially-conscious ventures that create value for all stakeholders, not just shareholders. “Certified B Corp” designation is similar to Fair Trade USA’s “Fair Trade Certified” label that signals to consumers that the producer was audited and certified as complaint with international Fair Trade standards by this third-party nonprofit organization. “Certified B Corp” status is not a requirement for benefit corporations to secure or maintain benefit corporation status, but rather is B Lab’s endorsement of quality. A business becomes a “Certified B Corp” by meeting certain performance standards relating to governance and transparency, employee compensation and support, community engagement, and environmental sustainability on B Lab’s B Impact Assessment, as well as certain legal entity structure requirements regarding choice of entity and state of incorporation. If accepted for B Lab certification, the company must sign B Lab’s B Corp Declaration of Independence and B Corp Agreement, and pay an annual fee indexed to the business’ annual sales. Here is how benefit corporations relate to Certified B Corporations:
Source: B Labs, Certified B Corps and Benefit Corporations
Benefit Corporations Compared to Not-for-Profit Entities
A benefit corporation straddles the profit generating goals of a traditional business corporation and the socially beneficial mission and objectives of a not-for-profit corporation, though a benefit corporation is an entity all its own. A not-for-profit entity dedicates its assets, and uses surplus revenue generated from its activities, to further the organization’s mission and objectives, and not for the pecuniary benefit of its members or management. This is distinctly different from a benefit corporation, which is owned by shareholders who receive economic value from their ownership interests, such as dividends and distributions upon dissolution. For that reason, benefit corporations are taxed under the Internal Revenue Code as business corporations—as either C corporations or S corporations—and are not exempted from paying income tax under Section 501 as are many (but not all) nonprofits, such as the well-known 501(c)(3) charitable organization.
Not-for-profit entities are restricted, both by corporate law and tax law, from engaging in certain activities that depart from its mission and, if applicable, its tax-exempt purpose, and often rely on external funding sources, such as patron donations, fundraising, and foundation or government grants. Benefit corporations are not restricted in that way and can pursue diverse revenue streams like a traditional business, but when appropriate, dedicate resources and funds and give consideration to social, charitable, environmental, educational, sustainable, and other public causes and issues like not-for-profits. It’s this balance that has popularized the benefit corporation among socially conscious businesses, and led many well-known and well-respected brands of varying corporate structure to become Certified B Corporations, including Kickstarter, Warby Parker, Ben and Jerry’s, and Etsy.
Other Social Enterprise Business Structures
There are new business models in addition to the benefit corporation, such as the social purpose corporation and the low-profit limited liability company (abbreviated as L3C), that allow founders and shareholders to use profit-generating activities to support chosen social causes. While many states have introduced or enacted benefit corporation legislation, fewer states have adopted the social purpose corporation and low-profit limited liability company entity structures.
Source (State-by-State Status): Social Enterprise Law Tracker
Converting to a Benefit Corporation
The model benefit corporation legislation provides a statutory mechanism for converting between a business corporation and a benefit corporation structure since both are typically governed by a common set of corporate laws. This conversion typically involves an amendment to the corporation’s articles of incorporation to include the requisite commitment to a publicly beneficial corporate purpose. Both New York and Delaware have such conversion statutes.
However, it’s often not as easy to convert between a not-for-profit corporation and benefit corporation structure since states typically govern not-for-profits under a set of not-for-profit corporate laws distinct from business corporation law. In New York, not-for-profit corporations are not eligible for conversion because they are incorporated under the Not-for-Profit Corporation Law, and not the Business Corporation Law, so in order to make the transition, the not-for-profit would have to dissolve and reincorporate as a benefit corporation under the Business Corporation Law. So this entity change is certainly possible with just a few more steps.