What is a "B Corp"?
The term "B Corp" is informal. It may refer to legislatively recognized "benefit corporations" or to companies privately certified by an outside party, such as the "Certified B Corporation®" status offered by B Lab®. From a legislative standpoint, a benefit corporation is a new corporate form offered in states from South Carolina to California. In these states, companies have the option to incorporate – or re-incorporate – as a benefit corporation instead of a C Corp, S Corp, nonprofit, or other type of legal entity. More than 40 states have passed or have proposed legislation recognizing this new benefit corporation form (see our Benefit Corporation Legislative Status Map and Chart for details about each state's passed or proposed legislation). This corporate form was designed to accommodate the sustainable business movement and to provide legal protection to for-profit entities that have an identified social mission – that is, companies that provide society with some type of public "benefit."
Why become a legislatively recognized benefit corporation?
The main legal benefits of becoming a legislatively recognized benefit corporation are generally (1) protecting the company from shareholder suits complaining that the company's management is focusing on considerations other than maximizing profits and (2) weaving the company's social mission into the corporation's formative documents, so that the mission cannot be eviscerated by a hostile takeover without a supermajority vote of shareholders. Financially, there can be other advantages. For example, some jurisdictions offer tax breaks and bidding preferences to benefit corporations.
Benefit corporations also offer advantages over non-profit status for some socially minded companies. Tax-exempt nonprofits have obvious tax advantages and can earn profits, but they cannot distribute their profits, as there are no shareholders. A benefit corporation can have shareholders, raise capital more freely, distribute profits, and pursue its for-profit business goals at the same time that it pursues its identified social missions or public benefits.
Why become a privately certified benefit corporation?
Even in jurisdictions that do not recognize benefit corporations as a separate legal form (and in those that do), socially conscious companies can seek appropriate, private certifications. Private certifiers for companies committed to sustainability and TBL (the triple bottom line of profits, people, planet) include B Lab®, Ceres, Food Alliance, the Global Reporting Initiative, Green America, GreenSeal, and others. Some of these certifiers offer businesses helpful resources and networks. For example, B Lab® offers its certified members cost savings and access to expertise. (See http://www.bcorporation.net/become-a-b-corp/why-become-a-b-corp/save-money-and-access-services)
As Martin Zwilling points out in 7 Benefits For Startups Joining The B-Corp Movement, startup companies can use the benefit corporation model to their competitive advantage in several ways. They can attract investors who favor corporate entities that integrate social responsibility. They can develop a broad, reliable consumer base, as customer loyalty is usually very high for socially conscious startups. Socially conscious products usually sell at a premium, which can provide a steady source of profits in the startup phase. Finally, socially conscious companies typically have better organizational performance, because employees are loyal to the company's mission. Human capital is usually retained for a longer period of time, reducing employee retention and recruiting costs. (See Zwilling's article here (citing ideas from the 2012 book, "Mind Your Business: Thoughts for Entrepreneurs," by international entrepreneur Toine Knipping). These competitive advantages could apply to legislatively recognized or privately certified benefit corporations.
What is B Lab®?
B Lab®B Lab® is a 501(c)(3) organization that provides a rigorous, private certification system for companies that "use the power of business to solve social and economic problems" (www.bcorporation.net/become-a-b-corp). B Lab® also advocates for the passage of benefit corporation legislation across the U.S., and proposed the Model Benefit Corporation Legislation ("Model Legislation") that many states have largely incorporated as their own statutes (see our Benefit Corporation Legislative Status Map and Chart for details). Further, many states that have passed legislation recognizing benefit corporations require an independent third party to conduct periodic assessments of the company and release the results of such assessments to the public in order to provide transparency and accountability. B Lab® can satisfy those requirements in many states through its assessments of a company's social and environmental performance, accountability, and transparent governance. To learn more about B Lab®, click here.
What are the requirements for becoming a legislatively recognized benefit corporation?
The requirements vary from state to state. Generally, a legislatively recognized benefit corporation must have an identified public benefit. The officers and directors of legislative benefit corporations are typically required to consider the interests of nonfinancial stakeholders as well as the financial interests of the corporation. Finally, benefit corporations are usually subject to third-party reporting requirements and standards. As our Benefit Corporation Legislative Status Map and Chart indicates, there are two leading models for benefit corporation legislation – the Model Legislation offered by B Lab® and the Delaware/Colorado-type model passed in 2013. Our Benefit Corporation Legislative Status Map and Chart explain these differences in detail, and we provide an overview of the key differences below.
Which states recognize benefit corporations as a legal entity?
The following states (and the District of Columbia) legally recognize some variation of benefit corporations: Arizona, Arkansas, California, Colorado, Connecticut, Delaware, Florida, Hawaii, Idaho, Illinois, Louisiana, Maryland, Massachusetts, Minnesota, Nebraska, Nevada, New Hampshire, New Jersey, New York, Oregon, Pennsylvania, Rhode Island, South Carolina, Tennessee, Utah, Vermont, Virginia, Washington state (where this new legal entity is called a "social benefit corporation"), and West Virginia. The following states have introduced some sort of benefit corporation legislation in previous legislative sessions: Alabama, Alaska, Georgia, Indiana, Iowa, Kansas, Kentucky, Michigan, Montana, New Mexico, North Carolina, Ohio, Texas, and Wisconsin. See our Benefit Corporation Legislative Status Map and Chart for details about each state's passed, proposed, or failed legislation and for a discussion of whether each state tends to track the B Lab® Model Legislation or the Delaware/Colorado-type model passed in 2013.
What is a general public purpose?
Under the Model Legislation, benefit corporations must have the purpose of "creating a general public benefit," which is often defined as "a material positive impact on society and the environment, taken as a whole, assessed against a third-party standard, from the business and operations of a benefit corporation." The Model Legislation and most state statutes recognize at least one of the following specific public benefits: (1) providing low-income or underserved individuals or communities with beneficial products or services; (2) promoting economic opportunity for individuals or communities beyond the creation of jobs in the ordinary course of business; (3) preserving, protecting, or restoring the environment; (4) improving human health; (5) promoting the arts, sciences, or advancement of knowledge; (6) increasing the flow of capital to entities with a public benefit purpose; or (7) the accomplishment of any other particular benefit for society or the environment.
Most states that have adopted benefit corporation legislation require benefit corporations to "have a purpose of creating general public benefit," but make the pursuit of one or more of the specific public benefits identified above optional. Model Act § 201(a), (b). In contrast, pursuit of one or more specific public benefits is mandatory in Colorado and Delaware. The Colorado and Delaware Acts each require a benefit corporation in those states to "identify within its statement of business or purpose … one or more specific public benefits to be promoted by the corporation."1
How does a benefit corporation change the responsibilities of directors?
Under the Model Legislation and the state statutes that have adopted similar language, directors of a benefit corporation, in considering the best interests of the corporation, must consider the effects of any action or inaction upon the following: (1) the shareholders of the benefit corporation, (2) the employees and workforce of the benefit corporation, (3) the interests of the benefit corporation's customers, (4) community and societal factors, (5) the local and global environment, (6) the short-term and long-term interests of the benefit corporation, and (7) the ability of the benefit corporation to accomplish its general benefit purpose.
Directors of benefit corporations organized under Delaware or Colorado law must manage those corporations against a different standard, however. Instead of "considering" the best interests of the benefit corporation, directors of Colorado and Delaware benefit corporations must "balance" the "pecuniary interests of the shareholders, the best interests of those materially affected by the corporation's conduct, and the specific public benefit" identified in the benefit corporation's articles of incorporation.2 It will be interesting to see how courts interpret the difference (if any) between "considering" and "balancing" those interests.
What are the reporting and third-party assessment requirements for benefit corporations?
The Model Legislation requires a benefit corporation to deliver an annual report to its shareholders and put the annual report on its website for public access. The annual report must detail the ways in which the benefit corporation pursued a general public benefit and the extent to which the general public benefit was created. If a benefit corporation identifies one or more specific public benefits in its articles of incorporation, the annual report must also include a narrative description of the ways in which the benefit corporation pursued each specific public benefit and the extent to which that specific public benefit was created. The report must also address any circumstances that hindered the creation of a general or specific public benefit.
In addition to the disclosure requirements, a benefit corporation's annual reporting must include an assessment of the overall social and environmental performance of the benefit corporation against a third-party standard, as well as the process and rationale for selecting or changing the third-party standard. The third-party standard is developed by an organization that is independent from the benefit corporation and will allow customers to differentiate between corporations acting for the general public benefit and companies that simply have good marketing programs. Examples of third-party standards organizations include B Lab®, the Global Reporting Initiative (GRI), Green America, GreenSeal, ISO 2600, and Underwriters Laboratories (UL).
The Model Legislation also requires benefit corporations to make certain disclosures in the annual report, including (1) the name of the benefit director and benefit officer (as those terms are defined in the Model Legislation) and the address to which correspondence to each of them may be directed; (2) the compensation paid by the benefit corporation during the year to each director; (3) a statement by the benefit director giving his/her opinion on (a) whether the benefit corporation acted in accordance with its general public benefit purpose (and any specific public benefit purpose the corporation identified) in all material respects during the period covered by the report, (b) whether the directors and officers complied with the Model Legislation, and (c) if, in the benefit director's opinion, the benefit corporation or its directors or officers failed to act or comply in the manner described above, a description of the ways in which the benefit corporation or its directors or officers failed to act or comply; and (4) a statement of any connection between the organization that established the third-party standard, or its directors, officers, or any holder of five percent (5%) or more of the governance interests in that organization, and the benefit corporation or its directors, officers, or similar five percent (5%) holder, including any financial or governance relationship that might materially affect the credibility of the use of the third-party standard.
Colorado's approach is slightly different. The annual report must describe how the company promoted (1) the public benefit that it is pursuing and (2) the best interests of those materially affected by the company's conduct. The report must also describe any circumstances that hindered the corporation's promotion of the best interests of those materially affected by its conduct. As in the Model Legislation, the annual report in Colorado must include an assessment of the company's overall social and environmental performance. Unlike the Model Legislation, however, the assessment in Colorado need not be performed, audited, or certified by a third party.
Like Colorado, Delaware does not require benefit corporations to use a third-party standard in connection with, and/or attain a periodic third-party certification addressing, the corporation's promotion of the public benefit or public benefits identified in the certificate of incorporation. Unless the company's certificate of incorporation or bylaws state differently, benefit corporations in Delaware do not have to provide any periodic report to the public. Instead, Delaware benefit corporations may simply file a report every two years, addressing the following: (1) the objectives that the board of directors has established to promote the corporation's specific public benefit; (2) the standards that the board of directors has adopted to measure the corporation's progress in promoting such benefits; (3) objective factual information based on those standards, regarding the corporation's success in meeting the objectives for promoting such benefits; and (4) an assessment of the corporation's success in meeting the objectives and promoting such benefits.
What protections does the benefit corporation entity offer to directors?
The true scope of protection offered to (and, for that matter, duties imposed upon) directors of benefit corporations will not be known until juries and courts begin weighing in on those issues. Part of the determination of the scope of protection will lie in how courts analyze the mandate that directors "consider" or "balance" the potentially competing interests of shareholders, the best interests of those materially affected by the corporation's conduct, and the general or specific public benefit the corporation pursues. The Model Legislation offers a glimpse into the expected scope of those protections. For example, the Model Legislation provides that a director's consideration of all stakeholders does not constitute a violation of the general standards for directors. The Model Legislation specifically excludes director, officer, and corporate liability for monetary damages. Directors are also protected from suits by beneficiaries of the corporation's public purpose.
The protection afforded to directors of Colorado and Delaware benefit corporations is more succinct: Such directors are deemed to have satisfied their fiduciary duties if their decisions are "both informed and disinterested and not such that no person of ordinary, sound judgment would approve." Moreover, the certificates/articles of incorporation of Colorado and Delaware benefit corporations may state that any disinterested failure to satisfy that standard shall not constitute an act or omission not in good faith, or a breach of the duty of loyalty.
Interested in becoming a benefit corporation?
Consider consulting with a lawyer who is familiar with the legal pros and cons of benefit corporations and the legal status of that structure in the business's planned (or current) corporate home. That lawyer or firm should also be familiar with the additional legal issues – labor and employment, tax, antitrust, and others – facing for-profit companies with an identified social mission.
Our law firm, Smith Moore Leatherwood LLP, has formed a "Benefit Corporation Team" (informally dubbed our "B Team") that includes litigators and corporate and real estate lawyers. We offer a variety of resources for aspiring and existing benefit corporations, whether they are legislatively recognized, privately certified, or just dipping their toes into this movement and want to know what the legal issues are.
Have questions or comments about this FAQ page? Contact Lisa Arthur.
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1 Public Benefit Corporation Act of Colorado, C.R.S.A. § 7-101-503; Delaware Public Benefit Corporations, 8 Del. C. § 362.
2 C.R.S.A. § 7-101-506(1); 8 Del. C. § 362.