The first post in an ongoing series about B corporations explains the certification and legal status of B- and benefit corporations and how they differ.
By Dirk Sampselle
Although “B Corporation” and “benefit corporation” are terms commonly used interchangeably, the B Corporation name is not just an abbreviation for the benefit corporation legal entity. As a benefit corporation consultant, former member of the B Lab policy team, and frequent speaker in the social enterprise startup scene, I constantly hear the two conflated.
The confusion stemming from this has inspired this blog post; may it liberate you from the confusion, and empower you to advocate for these great changes in corporate governance with knowledge and accuracy.
B Corporation Certification
The “B Corporation” certification is a label for businesses that use the power of business to solve social and environmental problems.
Unlike “Organic,” “Fair Trade,” or LEED certifications, the B Corporation certification does not look narrowly at product attributes to determine their environmental or social impacts; rather, B Corporation certification looks comprehensively at the entire business – its governance, suppliers, employees, and social and environmental impacts – to determine whether the business satisfies objective responsibility requirements. Companies are rated on a scale of 0 to 200, and those that achieve a score of 80 “pass” and become eligible to receive the certification.
B Lab, a nonprofit corporation based in Berwyn, Pennsylvania, administers the certification. B Lab conceived the certification in order to increase transparency, improve accountability to mission, and decrease companies’ ability to create misleading social responsibility advertisements with little or no follow-through.
The certification standards are determined by two independent Standards Advisory Councils, comprised of thought leaders, social entrepreneurs, and practitioners with broad expertise from environmental sustainability to social responsibility to corporate governance. B Lab management holds only one seat on each Standards Advisory Council of over 20 leaders. The certification provides a wholly independent seal of approval for businesses legally and empirically accountable to pursuing the public good. Through the scoring tool, companies can also measure their performance and seek to improve it.
Benefits Of B Corporation Certification
For companies with annual sales under $2M, the certification costs only $500 annually, and benefits of certification include:
- Substantial discounts from a plethora of partners including Salesforce, Intuit, Inspire Commerce, and literally dozens of others typically offset the cost of certification within the first several months.
- Marketing and branding to consumers: market research has shown that consumers are more likely to believe a company’s claims when they are backed by an independent third party. Additionally, as B Corporations continue to increase in both number and notoriety, consumers will increasingly seek out brands that are B Corporation certified.
Large companies like Method, Seventh Generation, Care2, and Patagonia have already signed on alongside hundreds of small businesses and social enterprise startups.
- Marketing and branding to investors: investors passionate about investing in responsible companies will take ease in knowing that the B Corporation certified companies will be required to uphold the highest standards of transparency, ethics, and stakeholder responsibility. The certification supplements and simplifies impact investors’ own due diligence efforts by providing a layer of independent analysis.
- Greater profitability: Strengthening stakeholder ties with groups like the communities that support the business, the employees, and the business’s customers has been linked positively with profitability; so has driving down cost through eco-efficiency; and so has upholding heightened business ethics. Espousing B Corporation governance and operations principles may well make a company more profitable, not less.
Benefit Corporation Legal Status
While the “B” in B Corporation does stand for “benefit,” the benefit corporation legal entity is separate and distinct from the B Corporation certification. B Lab has been instrumental in advocating for the benefit corporation legislation, and many of the legal entity’s requirements and principles mirror those of the B Corporation certification.
But the benefit corporation is a legal entity, just like an LLC, or a traditional corporation, or a nonprofit corporation – it is not an independently-administered certification. To form a benefit corporation, you must file compliant articles of incorporation with the Secretary of the State in one of the ten states that have now passed benefit corporation statutes.
For an existing corporation wishing to become a benefit corporation, the articles must simply be amended to comply with the benefit corporation statute. These statutes have been passed at a rapid rate and are likely to exist in more than a dozen states by 2013. None of the statutes require an entity to become B Corporation certified, although many benefit corporations choose to become B Corporation certified.
Key Components: The Benefit Corporation
Key components of the benefit corporation legal entity include:
- Public Benefit Purpose: A benefit corporation has the purpose of creating a general public benefit, defined as a material positive impact on society and the environment, as assessed against a third-party standard. This expands the ability of the corporation to pursue a purpose not strictly related to return on investment to shareholders (as is the case with traditional corporations); it also expands the corporation’s accountability to the public benefit purpose.
- Transparency and Reporting: Each year, the benefit corporation must make publicly available a report detailing its social and environmental performance. In order to ensure independence, objectivity, and transparency in the reporting, the report must be prepared in accordance with a third-party standard such as B Lab’s B Corporation standard, or any of the dozens of other available independent standards.
- Benefit Enforcement: Shareholders can bring an enforcement action against the corporation to hold the corporation accountable to its public purpose. Broadening the scope of enforceable duties of the corporation should create greater accountability to its beneficial purpose. So, while it expands what the corporation is allowed to do, it also likely expands what it must do.
- Fiduciary Duties: Directors and Officers in several states (see our state-by-state comparative analysis for detailed information) are required to consider the effects of the corporation’s activities on a broad array of stakeholders, such as shareholders, employees, customers, the community, the local and global environment, and the long-and short-term interests of the corporation. While this may be arduous in practice, most modern research on corporate governance indicates that considering stakeholders is actually a best practice for an enterprise seeking long run, sustainable profitability.
It should also be noted that neither becoming a benefit corporation nor getting B Corporation certified has any impact on the entity’s federal tax status: any corporate entity – benefit corporation or otherwise – will be either a C Corporation or an S Corporation for federal tax purposes.
Being a B Corporation or a benefit corporation has no bearing on that status, and those enterprises can still elect either C or S status as a benefit corporation or a B Corporation. However, some state and municipal governments are starting to pass tax and procurement incentives for B Corporations and benefit corporation businesses.