A business may operate as a “for-profit” or a “not-for-profit” entity. For-profit businesses, often known as C corporations, primarily seek to generate revenue and maximize profit for the corporation’s owners, whether it be a sole proprietor, multiple partners, members or shareholders. Directors of for-profit businesses must 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 inflexible legal framework hindered social entrepreneurs desire to make money while furthering a social purpose. In response to this need, several states created a new business entity known as a “benefit corporation.”
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 creates a positive impact on society and the environment, even if it sacrifices a profit to do so.
Benefit Corporations and C Corporations Compared
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.
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 creates a positive impact on society and the environment, even if it sacrifices a profit to do so.
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.
Benefit Corporations and B Certifications
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 B 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 company an additional “seal of approval” for meeting the strictest benefit corporation standards. B corporations may become certified by agreeing to comply with the B-Lab’s standards and allowing 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 may, however, encounter more transaction costs than C corporations since they must create an annual report and maintain a certain level of transparency about its ability to meet its social purpose. Benefit corporations allow social entrepreneurs and directors to operate a company for the community and the shareholders, an appealing option in today’s day and age where consumers increasingly support only those socially responsible businesses.
Disclaimer: The information in this article is presented for informational purposes only, and should not be taken as legal advice. Before acting on any information presented in this article, you should consult an attorney regarding the facts of your specific situation. We would love to hear from you, so please feel free to contact us for a consultation.
Photos by Valerie Denise