Last week a close friend of mine asked me about “B Corps.” His question made me realize that few entrepreneurs know about this option when they are forming a company. This blog is intended to give you the basics of a B Corp, but if you are seriously considering creating a B Corp, please discuss this further with an attorney, as this blog is meant to be general information, not legal advice. If you would like to contact Law On The Runway, please email Rachel, at Rachel@lawontheurnway.com.
What is a B Corp?
People tend to use this term interchangeably for potentially two types of entities. However, it is important to keep the types conceptually separate. First, there is the Benefit Corporation, which is a corporate structure formed under the laws or regulations of one of 27 states which allow Benefit Corporations as a company structure. Second is the entity Certified B Corp, which is given to a company through a certification process, created by a nonprofit, B Lab. To find out what is required for the B Lab certification, please visit their website.
Why Choose To Be a Benefit Corporation
We aren’t going to touch much on the non-profit B Lab’s certification, since they have a detailed website explaining their mission and the certification process. Instead we will focus on the legal structure of Benefit Corporations. A benefit corporation allows the founders to place sustainability or social responsibility goals into their mission, and not be required to solely focus on maximizing profits for their shareholders. When incorporating or re-incorporating a company, in the corporate formation documents, founders can include various social goals, such as donating portions of the profits, or only working with suppliers or manufacturers who meet a sustainability threshold. This not only allows the executives of the company to focus on tasks other than maximizing profit, but it also protects the goals of the company, should the company be acquired, or have a management change. Additionally, some states do offer taxation breaks to benefit corporations.
Drawbacks of Benefit Corporations
The drawbacks of benefit corporations are mostly administrative. Holding your company to social responsibility standards requires extra documentation and careful watch over employees. Some also argue that investors are less likely to choose a benefit corporation since the a corporate executives can make decisions to further the social goals over profit gains. Finally, because these are new corporate structures, we have little case law showing how courts will analyze the duties of executives or directors.
How to Set Up a Benefit Corporation In California
Each state has unique legislation on corporation formation. Since Law On The Runway is located in California, we will give an overview of setting up one in California.
When forming a benefit corporation in California, the articles of incorporation must state that it is a benefit corporation. Through the ARTS-GS form, he share certificates must also note that it is a benefit corporation.
Once a year, the company it required to produce an “Annual Benefit Report” which assesses the company’s overall social and environmental performance, based on an independent party’s standard (often B Lab).
To check out some of the important California Statutes relating to the formation of a Benefit Company, please visit Corporation Code Sections 14600-14604.
Companies that are already created, can be come benefit corporations through editing their articles of incorporation, but the process to do that is unique to each company. One final note, benefit corporations are different than flexible purpose corporations, but that will be a topic for next week’s blog post.
For questions on this blog, please email Rachel@lawontherunway.com