Many businesses today claim that they’re in the business of “doing good.” And they do their best to prove it, often by publishing a page on their website or social media posts about their charitable efforts. But what if your business’s legal structure could vouch for your social commitments? It can, if you become a benefit corporation.
The benefit corporation movement was founded in 2007 by 81 companies seeking an alternative to the profit-only way of doing business. Like any other type of for-profit entity, a benefit corporation does, of course, focus on its financial returns. But unlike traditional businesses, it is equally focused on making a positive difference in the world around it. These companies acknowledge a responsibility not only to their stakeholders, but also to their communities and the environment — and they can legally state this as their objective.
“The benefit corporation is a remarkable and disruptive new vehicle,” said Jason Erb, director of strategic alliances for small business at business services company Wolters Kluwer’s CT Corporation. “Before its existence, directors and officers of public and private companies were obligated to consider shareholder returns above all else. Now, the benefit corporation entity structure enables companies to legally embrace other directives in addition to profit, such as the statutory mandate to provide a material, ‘positive benefit’ to society.” [What’s the Best Legal Structure for Your Business?]
Why become a benefit corporation?
It’s no secret that today’s consumers care a lot about ethical, social and environmental issues — so much so that it influences their purchasing decisions. A 2014 study by Nielsen found that more than half of global online consumers would pay more for products and services provided by companies that are committed to positive social and environmental action.
Because of this shift in attitude, businesses are clamoring to showcase their dedication to corporate social responsibility. Any company can say that it donates to charities or has a reduced carbon footprint, but with a benefit corporation, consumers get the assurance that it truly practices what it preaches: These entities answer to higher legal, social and environmental standards of performance and accountability.
“Benefit corporations have … different transparency and reporting requirements than other company structures,” Erb told Business News Daily. “For example, most states require these entities to file annual reports that are certified by a third party and often posted publicly, on whether or how they have furthered their goal.”
Rick Alexander, head of legal policy at B Lab, the third-party nonprofit organization that certifies benefit corporations, said that there are a number of operations-related perks to this legal structure as well.
“Benefit corporation status has advantages for every stakeholder in a business, from consumers and talent to shareholders and directors,” Alexander said. “Directors enjoy reduced director liability when making decisions that consider or balance nonfinancial stakeholders, while shareholders can hold the company accountable to its mission, all while enjoying all the precedents and protections found under current corporate law. [They can] protect their mission through capital raises and leadership changes, creating more flexibility when evaluating potential sale and liquidity options.”
How to do it
To legally become a benefit corporation, you first need to make sure that your home state acknowledges it as a valid business structure. At the time of publication, 30 states and the District of Columbia recognized benefit corporation status, although Erb noted that this number is increasing yearly. He advised interested business owners to research their state’s laws, and, if benefit corporations weren’t recognized there, find out if they could incorporate in a nearby state.
It’s important to note that becoming a benefit corporation does not change your tax status, and you will still maintain S corporation or C corporation status as a benefit corporation, Alexander said.
Businesses that want to take their social and environmental commitment even further can become a Certified B Corporation (or B Corp). This involves a rigorous assessment process by B Lab, which uses a survey to rate a company’s environmental practices, employee treatment, activism within its community and other factors. Businesses that surpass a certain score are certified by B Lab, which then audits them from time to time to ensure that they are living up to the movement’s standards.
“[B Lab certification] is like a Good Housekeeping seal of approval,” said David Murphy, former CEO of Better World Books, in a 2011 Business News Daily interview. “If your company is a Certified B Corporation, that really says something. You’re there to serve all those stakeholders, and you’re willing to prove it.”
To become a Certified B Corporation, a company must do three things, Alexander said. First, it has to demonstrate high social environmental performance on the B Impact Assessment test by scoring an 80 or above. It must be transparent about that impact by publicly reporting its scores on bcorporation.net, and finally, it must make a legal commitment to consider the organization’s stakeholders. Alexander noted that the form of that legal commitment depends on the type of entity you currently are (LLC, sole proprietor, corporation, etc.) as well as the state of incorporation, depending on its corporate statute.
“B Lab gives companies a grace period between their initial certification and when they must have made their legal commitment to stakeholders, but ultimately every company must make this legal commitment to maintain their certification,” Alexander said. “Right now, there are about 200 companies that are both Certified B Corporations and benefit corporations.”
Examples of B Corps
Better World Books, which is one of the founding B Corporations, is an excellent example of what the B Corp movement is all about. The online book retailer was founded in 2002, and states on its website that social and environmental responsibility is at the core of its business; it is not simply an “add-on component.”
The company operates using what it calls a triple bottom-line business model, the three bottom lines being financial, social and environmental. It makes its profit by selling new and used books, but it gives a percentage of its funds and unsold books to literacy foundations across the globe, including Books for Africa, Invisible Children, the National Center for Family Learning, Room to Read and Worldfund. If a book can’t be sold or donated, Better World Books ensures that it is properly recycled, Murphy said.
Alexander noted that many well-known companies have become benefit corporations. In 2012, national outdoor clothing company Patagonia became California’s first registered benefit corporation, and just this past year, Kickstarter converted to a PBC (public benefit corporation).
“There are already over 3,000 registered benefit corporations, including nearly 300 in Delaware and 200 in California,” Alexander said. “The Certified B Corp population has also grown. There are now 1,550 Certified B Corporations in 42 countries in 131 industries, [including] Ben & Jerry’s, Cabot Creamery, Laureate Education and Etsy.”
Because the benefit corporation model is still relatively new, Erb said that there will be a lot of questions and legislative adjustments along the way, especially since it’s not nationally recognized. However, the movement is well on its way to becoming accepted and standard in all 50 states.
“Many companies that have opted for [this structure] have seen tremendous benefits,” Erb said. “It is a model that is worth considering for a company that wants to incorporate social responsibility into its operating principles.”