The emergence of many high-profile brands (Patagonia, Kickstarter, etc.) as "B Corps," i.e., founders wanting to “do the right thing,” combined with the increased importance consumers are placing on the social and environmental impact of brands they support, is leading many startup founders to consider whether or not they should also become "B Corps." There is a lot to consider.
As an initial matter, the phrase "I want to be a B Corp" is often used interchangeably to refer to incorporating as or converting into a “benefit corporation” or applying for and being certified as a Certified B Corp—however, benefit corporations and B Corps are not synonymous. Below we (i) explore the differences between a benefit corporation and a B Corp, (ii) summarize the characteristics of a Delaware public benefit corporation (a type of benefit corporation) and a Certified B Corp, and (iii) discuss a few key issues to consider before electing to incorporate as a benefit corporation or obtain B Corp status.
How Is a Benefit Corporation Different Than a B Corp?
A benefit corporation (also known as a public benefit corporation or a social purpose corporation) is a specific type of legal entity that imposes legal requirements on the corporation and its directors. In contrast, a Certified B Corp or "B Corp" is a third-party certification, similar to an organic certification or LEED certification that is awarded by B Lab (a nonprofit organization) to any eligible company that pays the applicable membership fee.
To further add to the confusion between benefit corporations and B Corps, a benefit corporation does not have to obtain B Corp certification, but B Lab now requires Certified B Corps that are formed as corporations to become benefit corporations if such form of legal entity is available in the state of incorporation. More than half of the states in the in the country have benefit corporation statutes. Therefore, if a corporation desires to become a B Corp, it is likely that the corporation will also have to incorporate as or convert into a benefit corporation.
While a benefit corporation is not required to obtain B Corp certification, it may elect to because (1) the public is generally more familiar with Certified B Corps (which allow the business to use the recognizable B mark logo) than statutory benefit corporations, and (2) the annual reports required by B Lab can be useful to help satisfy the state legal reporting requirements of benefit corporations.
What Is a Delaware Public Benefit Corporation?
A Delaware public benefit corporation (PBC) is a for-profit corporation that has been incorporated in Delaware with the intent to produce one or more public benefits and operate in a responsible and sustainable manner. PBCs are distinguished from traditional for-profit corporations in the following ways:
- PBCs must commit to producing one or more public benefits for society and/or the environment;
- PBCs must consider their public benefit purpose(s) and interests of those materially affected by the corporation’s conduct in addition to stockholder value;
- PBCs have an obligation to report to stockholders on the corporation’s overall social and environmental performance; and
- Stockholders can bring lawsuits to enforce the corporation’s public benefit mission.
The majority of states now have their own statutory versions of the PBC, including Oregon, Washington, and California. While the requirements for benefit corporations in other states are similar to those of a PBC, they do vary (for instance, some states require a benefit corporation to make its stockholder reporting available to the public), so you will want to be sure you have a clear understanding of these requirements if you plan to incorporate your corporation in a state other than Delaware.
What Is a B Corp?
Certified B Corporations, or “B Corps,” are businesses certified by B Lab as meeting certain standards of social and environmental performance, accountability, and transparency. Despite what the name may suggest, a B Corp does not need to be a corporation. A B Corp may be a limited liability company, partnership, sole proprietorship, etc.
For B Corp certification, a business must score at least 80 out of 200 points on the B Impact Assessment, which is the tool used by B Lab to assess the business’s impact on it workers, community, environment, and customers. The information provided in the B Impact Assessment is self-reported by the business, although each year B Lab randomly selects a small percentage of B Corps for on-site review.
In addition to the B Impact Assessment, B Lab requires each B Corp to execute an “Agreement for B Corp Certification” with B Lab and has legal requirements that vary depending on the business’s entity type and state of formation. For example, if you are incorporated in Delaware, you must convert to a PBC, but limited liability companies must amend their operating agreement within 90 days of certification to include a social purpose clause and provisions related to balancing the interests of various stakeholders.
Once the business meets the impact and legal requirements, the business registers with B Lab and pays the requisite certification fees. Annual fees are tiered by annual sales revenues, ranging from $1,000 for companies with up to $150,000 in annual sales, to $50,000+ for companies with more than $1 billion in annual sales.
Finally, startups that have less than 12 months of operations are not eligible for B Corp certification because the certification is based on the practices and policies of a business over the prior 12-month period. However, in response to demand for B Corp certification for startups, B Lab created the "Pending B Corp" status.
Pending B Corp status allows a startup to indicate to customers, employees, and investors that the startup has a public benefit purpose and will be managed in a way that balances this purpose with stockholder value. Once the business has more than 12 months of operations, the business can apply to be a Certified B Corp. However, obtaining Pending B Corp status is not a requirement to later become a Certified B Corp.
Benefits and Drawbacks to Consider Before Becoming a Delaware Public Benefit Corporation or a Certified B Corp
Benefits to incorporating as or converting into a PBC include:
- PBCs require directors, in discharging their fiduciary duties, to consider and give weight to one or more of the social purposes of the corporation as they deem relevant. In contrast, directors of a traditional for-profit corporation are required to base their decisions on maximizing financial returns for stockholders, which can be difficult for corporations that are driven by a social mission or wish to be more socially or environmentally conscious in their decision-making.
- By including the public benefit purpose in the corporation’s certificate of incorporation (which is required of all PBCs), PBCs provide a clear indication to future customers, employees and investors of the business’ social impact goals, which may help attract and retain customers and employees.
Benefits to becoming a Certified B Corp include:
- B Corps are recognizable to the public as companies that are committed to balancing profit with a social and/or environmental purpose.
- B Corp certification is available to a variety of legal entities such as corporations, limited liability companies, partnerships, sole proprietorships, etc., whereas benefits corporations, including PBCs, are companies incorporated as corporations (i.e., not limited liability companies or partnerships). If your company has elected not to incorporate as a corporation, then B Corp certification allows your business to demonstrate its commitment to its social purpose without becoming a corporation.
Potential drawbacks or issues to consider before incorporating as a PBC or receiving B Corp certification include:
- PBCs are slightly more complicated to incorporate as or convert into because a PBC must define its social purpose at the time it becomes a public benefit corporation. This is not something that should not be taken lightly and will take additional time to properly and thoroughly prepare since the PBC is responsible for providing stockholders with updates on the PBC’s efforts to promote its social purpose and may be sued by one of its stockholders if the stockholder believes the social purpose is not being achieved. In contrast, this same level of thought over the company’s purpose is not required when incorporating a standard, for-profit Delaware corporation.
- Angels or venture capitalists might be reluctant to invest in an entity whose purpose is broader than purely maximizing stockholder returns. However, it should be noted that there are a growing number of angel investors and venture capital firms that desire to invest some or all of their investment capital in social purpose or social impact companies.
- There are additional costs and (potentially significant) administrative burdens associated with PBCs and Certified B Corps. PBCs and Certified B Corps have to prepare social purpose reports. This will likely take time to create, thereby adding costs to the company’s bottom line. Additionally, Certified B Corps are required to pay annual membership fees based on the B Corp’s annual sales.
- While Delaware case law provides substantial guidance on issues relating to corporations and corporate governance, there is limited guidance on how to balance the PBC’s public benefit purpose with its profit purpose.