The COVID-19 pandemic has resulted in unimaginable tragedy across the world. But it has also inspired a global desire to “do good” in response, whether that be in the form of increased donations to food banks, the creation of support funds for employees and contractors who have lost jobs, reconfiguring breweries and distilleries to produce hand sanitizer, acceleration of life science technology in efforts to develop a vaccine against COVID-19, refurbishing or manufacturing ventilators, creating new sterilization techniques for personal protective equipment—the list goes on. Entrepreneurs who emerge from the COVID-19 crisis with a desire to combine their business pursuits with a positive impact on the world may want to explore adopting a benefit corporation or a B Corp form for their company.
The terms benefit corporation and B Corp are sometimes used interchangeably but are in fact distinct—though related—concepts. Both benefit corporations and B Corps are companies that, in addition to being organized as for-profit entities, also seek to further public benefits beyond typical corporate social responsibility initiatives. There are key differences, however, between benefit corporations and B Corps.
A benefit corporation is a distinct type of legal entity. Just as a company may form as a limited liability company, a corporation or some other type of entity, so too may a company form as a benefit corporation. Currently, 37 U.S. jurisdictions (including California and Delaware) allow companies to form as some type of benefit corporation.
Although the details can vary depending on the jurisdiction, a key feature of a benefit corporation is that its legal framework clarifies that its directors (and officers in some situations) are not solely focused on maximizing shareholder value. Rather, directors and officers of benefit corporations also take into account the public benefit stated in the benefit corporation’s articles of incorporation and the effect of the benefit corporation’s actions on specific stakeholders who are not stockholders such as employees, customers, etc.
The practical implication underlying this feature is that directors and officers of a benefit corporation may act in a way that promotes stakeholder value and public benefits at the cost of short-term shareholder profit without necessarily exposing themselves to breach of fiduciary duty liability. The underlying theory, in turn, is that companies organized as benefit corporations are more likely to create positive impacts—even for persons who are not shareholders—as a result of this increased legal protection for their directors and officers. And in practice, the status of a company as a benefit corporation is often a key component of the company’s overall public image.
To maintain benefit corporation status, most jurisdictions require benefit corporations to provide a regular report (e.g., annual or biennial) to its shareholders (and often to the public as well) regarding the objective standard the board of the benefit corporation has selected to assess its progress in promoting its stated benefit, as well as key metrics measuring the degree to which the benefit corporation has achieved its goals since its last report.
In contrast to a benefit corporation, a B Corp is not a type of legal entity. Rather, a B Corp is any company that has been certified as such by independent nonprofit B Lab. Subject to certain requirements, any entity can be certified as a B Corp. For example, a company can be an LLC but also be a B Corp at the same time.
To earn B Corp certification, every three years, a company must submit to B Lab for its assessment key data (including revenue) and information regarding specific measures the company has undertaken in commitment to its purpose, accountability and transparency. If the company meets or exceeds B Lab’s assessment threshold, pays B Lab the annual certification fee and satisfies various other requirements, then the company may hold itself out as a Certified B Corporation, which includes the company’s use of the “Certified B Corp” logo in connection with its products or services. The annual certification fee owed to B Lab depends on the annual sales of a company but starts at $1,000. A summary of B Lab’s assessment of the company’s metrics is also made available to the public.
B Corps Must Eventually Become—or Act Like—Benefit Corporations
One other condition of B Corp certification is that a company must amend its governing documents to add a “legal requirement” that the company create a public benefit and that its management consider the interests of key stakeholders beyond stockholders. For companies that are organized as non-corporation entities or for companies that are organized as corporations in jurisdictions that do not recognize benefit corporations, this means the company must amend its governing documents to reflect the required commitments. Such amendments should be carefully evaluated as they may have unintended legal effects for the company, its management and its owners.
For companies that are formed as corporations in jurisdictions that recognize benefit corporations, the company must actually convert to a benefit corporation by a certain deadline.
Benefit corporations and B Corps offer founders added flexibility to manage their company in a way that is less beholden to generating profit above all else. Further, becoming a benefit corporation or B Corp can be a great way for a company to distinguish itself in the marketplace as having a strong commitment to social causes. There are additional items to consider, however, with either option.
First, significant legal consequences exist. The management of a benefit corporation is not just permitted to consider interests other than the profit of its stockholders, it is legally required to consider such additional interests. This means that stockholders can bring suit against the management of a benefit corporation if the management fails to properly consider all legally required interests. In other words, the key legal feature of a benefit corporation is a double-edged sword: the consideration of interests beyond just shareholder value can be used to protect management but it can also be used against management.
In addition, depending on the jurisdiction, benefit corporation status can automatically result in super-majority approval rights or appraisal rights for shareholders in connection with certain events like changing the benefit corporation’s stated benefit or undergoing a merger or acquisition. Such rights boil down to additional potential transaction and legal costs. As such, a company’s current capitalization table, fundraising plans and overall exit strategy should be evaluated to determine whether such additional legal rights may create roadblocks for the company in the future.
Second, founders of a benefit corporation or B Corp must spend time and effort to evaluate their metrics, track their metrics and prepare the report on their metrics that is necessary to maintain their status. These are resources that could be deployed on other things. In addition, the information in the applicable report may be available to the public. Some companies, especially early-stage companies, prefer to limit or control the amount of information available about their operations due to the way that employees, competitors or prospective investors may react to such information. Finally, if a company starts out as a benefit corporation or B Corp but then later determines it is no longer feasible to comply with the additional obligations of maintaining such status, then the decision to drop benefit corporation or B Corp status will be ascertainable by the public by the lack of continued reporting. As a result, the company may suffer damage to its reputation and credibility with its employees, customers and potential investors.
Third, there is still an element of relative unknown to benefit corporations and B Corps because they represent such a small portion of companies worldwide. For example, in 2018, 101,198 for-profit corporations were formed in California. Of those, only 50 (or 0.05 percent) were benefit corporations. Likewise, nearly 1.4 million business entities have been formed in Delaware as of 2018. In contrast, there are only 3,285 certified B Corps in existence today, according to B Lab. In fact, benefit corporations have only existed in the U.S. since 2010. Without more data and case law on B Corps and benefit corporations, it is difficult to predict the legal issues that may develop in the years to come.
In sum, benefit corporations and B Corps are both exciting options for entrepreneurs who want to combine their business goals with a desire to create a positive impact for a variety of stakeholders. Both benefit corporations and B Corps can provide for additional legal protection for the company’s management and unique opportunities to market the company as socially conscious. Before adopting either form, however, founders should consult with legal counsel and other advisors to make sure their overall company strategy is best served by the decision they make.
Patrick Klingborg is an associate with Pillsbury’s Corporate practice in the San Diego office. He is speaking at UCSD Extension’s upcoming webinar “What You Need To Know About B Corps and Benefit Corps” on May 15, 2020. The webinar is free but advance registration is required.