B-Corps and Benefit Corporations: Organizations for the 21st Century?

The concept of social enterprise is popular these days, with frequent talk of “for profits” seeking social good and “non profits” pursuing revenue generation. In accord with these trends, more than half of states now allow “benefit corporations,” or a hybrid for-profit legal entity whose purposes include providing public benefit.

Since the first state adopted enabling legislation in 2010, more than 30,000 businesses of varying sizes, shapes, and ages have formed as, or converted into, a benefit corporation. Notably, benefit corporations cannot currently be formed under Michigan law; however, bipartisan benefit corporation legislation has been introduced and is currently pending.

What does it mean to be a “benefit corporation”?
Requirements vary state by state, but in general it is hybrid for-profit corporation whose purposes are expressly required under state law to include public benefit, defined as “a material positive impact on society and the environment, taken as a whole . . . from [its] business and operations.” The benefit corporation evaluates and publicly reports impact on all stakeholders through transparent and measurable standards, sometimes including third-party verification. Under federal tax law, and in most states, a benefit corporation does not receive special tax status or benefit.

The model benefit corporation legislation is popular but has received some criticism from social enterprise critics and supporters alike: some feel the mechanisms for identifying and reporting public benefit are too clunky, too relaxed, or too onerous, without necessarily ensuring sufficient public benefit return.

Is a new legal structure really necessary?
For many organizations, probably not, but it may be beneficial. Traditional legal structures give organizations two options: non-profit or for-profit. In reality, many “for profit” companies have long considered public benefit for both moral and pragmatic reasons. However, legal scholars disagree whether corporate law requiring a for-profit corporation to organize and operate for shareholder welfare allows consideration of interests outside of profit maximization. Famously among legal nerds, it was fiercely debated whether corporate law compelled beloved dessert purveyors Ben and Jerry to abandon their “double dip” bottom line of “profits and people” to sell out to the highest bidder and maximize shareholder profit.

The benefit corporation structure removes any legal ambiguity and indisputably protects the corporation from shareholder suits seeking profit maximization.   It provides a public commitment and legal responsibility to meet certain public benefit standards.

Is a “B-Corp” the same as a Benefit Corporation?
No, although it serves a similar purpose.  “B-Corps” (aka “B-Corporations”) are certified by a private, third-party entity as meeting certain socially- and environmentally-conscious performance, transparency, and accountability standards. B-Corp status does not create or require a specific legal or corporate entity and can come in any number of legal forms, including a traditional LLC or a corporation, although usually the organizing documents contain a commitment to public benefit. Michigan has seen an influx of B-Corps, including locally Higher Grounds (as reported in the June TCBN).

Are there benefits to the “B-Corp” or “Benefit Corporation”?
Only time will tell. Scholars have debated whether a for-profit corporation should consider broader societal impact as a matter of shareholder welfare or moral duty even longer than they’ve debated its legality. However, research suggests and companies report that there may be benefits to focusing on purpose beyond profit.

In the era of poverty when the for- and nonprofit distinction was created, a business concerned with well-being could have a significant positive societal impact by focusing on wealth generation. However, the marginal return of wealth to well-being significantly diminishes after an individual achieves a base level of economic security already reached by many in the United States today. Wealth generation may still have benefits; but much more significant increases in well-being can be obtained by cultivating factors such as an individual’s sense of purpose, resiliency, positive relationships, autonomy, and engagement.

Further, focusing on purposes beyond profit may not only fail to harm a company’s financial bottom line, but may also improve it.  Benefit corporations and B-Corp certified companies differentiate themselves to customers, investors, and vendors based on a commitment to provide public benefit. B-Corps enjoy a formal network of B-Corps that share resources and best practices with each other. And research suggests that individuals are more productive and engaged long-term when moved by intrinsic motivations, such as a sense of purpose or engagement, as compared to extrinsic rewards.

In general, it is this author’s opinion that the time has come to revisit the utility of our heavy reliance on the “for profit” or “non profit” distinction. Benefit corporations and B-corps indisputably have room for improvement. But they are a welcome first step in creating legal structures that reflect rather than hinder the reality that most organizations, especially those concerned with the future well-being of individuals and communities, hold a “purpose” that is much richer and more complex than simply being “for” or “not for” profit.

Kate Redman is a community enterprise attorney with Olson, Bzdok & Howard, PC, serving small business and nonprofits in northern Michigan. Learn more about her work at www.envlaw.com.