Part 4 of a series on the B Corporation explains the legal requirements of establishing a B corporation.
By Dirk Sampselle
One of the most common questions I get – “what is the difference between a B Corporation and a benefit corporation?” – is sometimes followed by the equally-important but less-frequently-asked question, “how do they relate to one another?”
To address this nuanced question, I'll proceed in two parts: first, a summary of the B Corporation certification’s legal requirements, and second, a summary of the benefit corporation statutes’ third-party requirements.
In other words, what legal adjustments, if any, do I need to make in order to become a certified B Corporation? And, if I am a benefit corporation, what are my third-party-standard requirements, viz what are the statutory requirements related to reporting or performing according to standards set by third-parties?
B Corporation Legal Architecture
First, as I have explained in detail before, the B Corporation certification is a certification, not a legal entity. However, “B Corporation” used colloquially may refer to any business which has achieved the certification, and by inference, it may also refer to the legal architectures that are permitted and/or required by the B Corporation certification standards.
So, “are you a regular corporation or a B Corporation” is, in a sense, an appropriate and accurately-stated question given that the certification imposes some legal requirements. What is the legal architecture that businesspeople and sustainability activists refer to when they say, "that company is a B Corporation, not a regular corporation?"
Generally, B Corporations can take one of two legal forms: a Limited Liability Company (LLC), or a Corporation (in other words, you could become a B Corporation that is not in fact a corporation at all, but rather a company – a limited liability company.) There are important distinctions between an LLC and a corporation that I will not cover here, but suffice it to say that both forms provide the level of governance oversight and accountability required for achieving the B Corporation certification.
Embedding Mission and Stakeholder Considerations
More specifically, the requirement imposed by the B Corporation certification on corporations and LLCs is actually simply to amend the governing documentation to “embed” mission and stakeholder considerations into the “legal DNA” of the business.
If you choose to be a B Corporation LLC, the requirement is quite simple and uniform across all states: you must simply amend your operating agreement to contain the language specified by B Lab, which states that you will consider your stakeholders to the extent allowable by law. There are no other legal requirements for becoming a certified B Corporation.
State Statutes on B Corporations
The requirement is a bit more complicated if you desire a true corporate form. Because the law of corporations varies state by state, the requirement for achieving B Corporation certification actually depends on the state in which a B Corporation is incorporated or formed.
Bear in mind that a business can be formed in a state in which it is not actually headquartered or operating. There are two factors that determine the legal requirements to achieve B Corporation certification as a true corporation:
- Whether the state has a benefit corporation statute, and
- Whether the state has a constituency statute.
I’ll discuss constituency statutes in my follow-up post but suffice it to say that the constituency statute is a separate statute that affects how mission-centered decision-making might be interpreted by the courts of the state.
Here’s the breakdown according to those two factors:
- In non-constituency-statute states that have not yet passed the benefit corporation legislation, no intra-corporate legal adoption is required. Rather, when the assessment process is completed with B Lab, the entity will enter into an agreement with B Lab to consider its stakeholders to the maximum extent allowable by law. B Lab provides the list of stakeholders. The business doesn’t have to amend its articles. (AL, AK, AZ, AR, CO, DE, KS, MI, MT, NC, NH, OK, TX, UT, WA, or WV)
- In non-constituency-statute states which have passed the benefit corporation legislation, corporations seeking to preserve their corporate structure while achieving B Corporation certification must become benefit corporations. Traditional corporations that are either existing or prospective B Corporations have two certification cycles (two to four years) to adopt the benefit corporation form.
For example, company A becomes certified on January 2, 2013. Benefit corporation legislation is passed in company A’s state of incorporation on January 3, 2013. Company A has until January 2, 2017 to transition into the benefit corporation form (the end of the certification term after the current term).
Counterexample, company B becomes certified on January 2, 2013. Benefit corporation legislation is passed in B’s state of incorporation on January 1, 2015. Company B has until January 2, 2017 to transition into the benefit corporation form. (CA, SC, and VA)
- In constituency statute states that have not yet passed the benefit corporation legislation, prospective B Corporations seeking to keep their corporate structure must simply add a provision to their articles stating that the board will consider the stakeholders of the corporation; B Lab provides the list of stakeholders. (CT, FL, GA, ID, IN, IA, KY, ME, MN, MS, MO, NE, NV, NM, ND, OH, OR, RI, SD, TN, WI, or WY)
- In constituency statute states that have passed the benefit corporation legislation, prospective B Corporations seeking to keep their corporate structure have two options. The first option is to keep the traditional corporation – and not transition to become a benefit corporation – but to adopt the mandated stakeholder consideration language. The second option is to become a benefit corporation under the state’s benefit corporation statute. (IL, LA, MA, HI, MD, NJ, NY, PA and VT)
B Lab’s legal roadmap is available here.
Benefit Corporation Third-Party Requirements
A key feature of the benefit corporation legal entity is that it requires benefit corporations to maintain performance and reporting activity with regard to a third-party standard. Namely, benefit corporations are required to:
- Have a purpose of creating “General public benefit," defined 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 the benefit corporation.
- They also are required to deliver to each shareholder an annual benefit report, which includes a narrative description of all the board’s process and rationale for selecting the third-party standard that was used to prepare the benefit report, the ways in which the benefit corporation pursued a general public benefit during the year and the extent to which that general public benefit was created, and, finally, among other things, an assessment of the overall social and environmental performance of the benefit corporation, prepared in accordance with a third-party standard. Importantly, with regard to (b), the statute states that the assessment does not need to be audited or certified by a third party.
To begin with the duties under (a), a benefit corporation must consider its performance as assessed against the third-party standard when making board-level decisions; it must pursue the creation of general public benefit, including at least in part, the creation of positive outcomes as defined by the assessment.
It does NOT require the benefit corporation to CREATE public benefit outcomes – according to a third party standard or any other subjective standard – any more than a traditional corporation is required to CREATE shareholder wealth: traditional corporations are required to pursue the creation of shareholder wealth, and often fail at doing so. Such failure does not create an ipso facto breach of directorial duties to the corporation or its shareholders. Likewise, there is no duty to create general public benefit in benefit corporations, lest well-intended entrepreneurs would be jailed for every failure.
Important to note for the duties under (a) is the fact that it is clear throughout the statute that benefit corporations are free to select a third-party standard of their own choosing. The statute sets out a healthy and transparent set of criteria for determining whether a third-party standard will qualify. The following features are the most notable:
- The standard must be comprehensive in assessing the impact of the business on the corporation’s stakeholders defined in the statute.
- The standard must be developed by an entity that is independent (the “independence” set of provisions are some of the most robust in the entire statute and mitigate potential conflicts of interest between standard-setters and standard-users).
- The standard must be developed using a multi-stakeholder approach including a public comment period; the standard must also access the “necessary and appropriate” expertise to assess social and environmental performance.
- Finally, the statutes contain a set of sunlight provisions, which state that all the elements of the third party and its standard must be publicly disclosed.
Placing Benefit Corporations in The Driver’s Seat
The third-party-standard provisions of the statute effectively relieve courts of the dilemma of measuring and determining the outcomes – a task courts (notoriously backward-looking, precedent-constrained bodies of government) are ill equipped to undertake. Consequently, the provisions place benefit corporations in the driver’s seat in determining which third-party standard to utilize.
B Lab proffers the B Corporation standard, which is almost certain to satisfy the benefit corporation statute; the informational site lists a dozen other standards that are likely to satisfy the statute as well.
Once the benefit corporation has selected its third-party standard (notably, the selection process itself must occur in compliance with the fiduciary duties of the directors and officers), the duties under (b) above become clear: the report must address elements measured and evaluated by the third-party standard and describe the results of that evaluation; the report must then be made publicly available, either by submitting it to the appropriate secretary of state, or by posting the report on the corporation’s website.