Breaking Down the Benefit Corporation

For-profit businesses primarily seek to generate revenue and maximize profit for the owners, whether they are a sole proprietor, multiple partners, members or shareholders. Directors of corporations use their business judgments to run the company with one purpose only—to maximize shareholder profits, otherwise shareholders may sue directors for breach of their fiduciary duties.

On the other hand, nonprofit organizations serve a social purpose or some “greater good,” and unlike for-profit business executives’ profit maximizing purposes, non-profit executives cannot seek personal profit, and must reinvest any of the organization’s profits back towards its mission.

Until recently, this either or approach hindered social entrepreneurs from pursuing profit and purpose. In response to this need, several states created a new business entity known as a “benefit corporation.”

What are Benefit Corporations?

Benefit corporations are for profit and not tax exempt entities and generally operate as a traditional C corporation, but unlike C corporations’ sole profit maximizing objective, a benefit corporation must also pursue a “general public benefit.” A benefit corporation is a business with two purposes—to generate revenue and to pursue a social mission. Thus, a B corporation combines features of profit and nonprofit entities and positively impacts society and the environment, even if it sacrifices a profit to do so.

Benefit Corporations v. Regular (“C”) Corporations

Unlike C corporation directors who risk personal liability for running the company in a way contrary to maximizing shareholder profits, benefit corporation directors are generally immune from shareholder liability for performing their duties, which require them to consider how their decisions will affect their employees, the community and the environment, in addition to their shareholders.

Benefit corporations must file an annual report and show how their performance benefitted social and environmental goals according to a “third party standard.” While this may seem like a hassle, benefit corporations often enjoy a marketing advantage over C corporations because they can market their B Corp. status and social responsibility in a way appealing to many consumers who increasingly consider the ethics and social responsibility of a company when making purchasing decisions.

Certified Benefit Corporations

A registered benefit corporation differs from a certified B corporation. A registered benefit corporation, as we described above, is a business entity created under state law that allows a company to incorporate as a benefit corporation as an alternative to a traditional C corporation.

On the other hand, a business may become a certified benefit corporation after it applies for and receives a voluntary certification from the B Lab—a nonprofit organization dedicated to building a global community of certified benefit corporations who meet overall high standards of verified, social and environmental performance, public transparency, and legal accountability.

In other words, a B Certification gives a registered benefit corporation an additional “seal of approval” for meeting the strictest benefit corporation standards. A benefit corporation may become certified if it agrees to comply with the B-Lab’s standards and allows the B-Lab to monitor its performance.

Overall, a benefit corporation provides an appealing business model to mission driven and socially conscious businesses as well as impact investors and social entrepreneurs, who may now seek profits with social purpose.

Benefit corporations do come with a price, however. They encounter more transaction costs than C corporations, since they must create an annual report and maintain transparency about their ability to meet their social purpose—without the tax-exemption benefit that 501(c)(3) nonprofits enjoy.

By: Jenna Macek

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Photo credit:  Jackie Wonders