The Benefit Corporation: A New Trend in Social Entrepreneurship

One of the major complaints against corporations from the more socially-concerned is that corporations and other companies are only concerned about the bottom line — their duty is only to the company and to the shareholders/owners, to the exclusion of other, perhaps larger concerns such as the environment, the company’s employees, the company’s customers, or society in general. And while this is true to a large extent (it was only a few decades ago that corporate philanthropy was universally permitted by law, for example), a recent trend in corporate and business law aimed at correcting the perceived eschewing of societal interests is the development of the Benefit Corporation, or B-Corp.

The B-Corp movement has been spearheaded by a non-profit group known as B Lab (www.bcorporation.net), which has sought to encourage companies to adopt the B-Corp model and connect the B-Corp community together through mutual cooperation by promoting discounts for goods and services among B-Corps. B Lab certifies companies (of any business organization form) that adopt the B-Corp model into the company’s articles/bylaws/operating agreement.

In addition certifying companies as “B-Corps”, B Lab has also been lobbying states to adopt B-Corp statutes so that companies may legally organize as B-Corps. So far, only six states have adopted B-Corp statutes — California, Hawaii, Virginia, Maryland, Vermont, and New Jersey — while another five states — Colorado, New York, North Carolina, Pennsylvania, and Michigan — are considering B-Corp statutes. In these states a normally-organized corporation can elect to be designated a B-Corp by amending their articles of incorporation and bylaws to bring them in compliance with the B-Corp statute.

It is important to note the apparent distinction between B Lab’s certification process and the state B-Corp statutes: B Lab’s certification process appears to be an informal designation that any form of business organization — whether it be a corporation, LLC, partnership, joint venture, or sole proprietorship — can achieve. Conversely, in states that have B-Corp statutes, by incorporating then drafting articles of incorporation and bylaws consistent with the B-Corp statute, corporations legally, in the eyes of the state, become B-Corps (they may then also apparently seek B-Corp certification from B Lab).

So what makes a business a B-Corp? According to B Lab, a B-Corp is a company whose governing documents require the company’s managers to try to “create a general public benefit, defined as a material positive impact on society and the environment, taken as a whole, as assessed against a third party” — the company may optionally prioritize specific public benefits over others; according to B-Corp articles/bylaws/operating agreement, the creation of a public benefit is considered to be in the best interest of the company. While the managers’ duty is still nominally to make decisions in the best interest of the corporation as it is traditionally understood, they may consider the effects of their decisions on other groups or interests, such as employees, suppliers, customers, the communities in which the business operates, or the environment (B Lab refers to these groups as “stakeholders”) as being in the best interest of the business. While they are not required to give priority to one stakeholder over another, they may do so, especially if it serve a public purpose of importance to the business. These considerations operate both in managers’ day-to-day decisions as well as in major strategic decisions. Managers are legally protected in their decisions that consider the creation of a public benefit as in the best interest of the company; however, they are not required to actually succeed in creating a public benefit and are also legally protected if they fail in actually creating a public benefit — all that is required is the good-faith effort. In addition to the public benefit requirement, B-Corps are also expected to become more transparent in their management processes; for example, B-Corps are required, at least for B Lab B-Corp certification (and under most of the state B-Corp statutes), to publish an annual Benefit Report to document their effort toward creating a public benefit.

Becoming a certified or legal B-Corp does not entitle third parties to have a right of action against the business for failure to try to create a public benefit — only owners and managers retain the right to bring of cause of action for failure to attempt to create a public benefit, or for any other cause of action that may otherwise normally arise with any business.

B-Corp status may be an attractive proposition for social entrepreneurs — for entrepreneurs who plan to ultimately sell off their businesses, baking the B-Corp ethos into their companies’ business structures can ensure that the company remains committed to the public benefit mission after the company passes from the entrepreneur’s control. However, for startups with investors, operating under the B-Corp ethos in states that do not yet legally recognize it may be a more difficult proposition. For example, in the bylaws/operating agreement language B Lab suggests for a Massachusetts business seeking to become a “B-Corp”, the company would be permitted to consider “stakeholder” interest in, for example, a sale of the company, which consideration would result in the managers accepting a lower share price. As I understand traditional business law, accepting a lower share price based on public benefit considerations is impermissible.

More generally speaking, in the 44 states that do not yet legally recognize the B-Corp, making strategic decisions that factor in public benefit concerns to a larger extent than a normal company might subject managers to liability from shareholders who disagree with the decision or are upset that other factors have been considered over the interest of shareholders. In states that do not yet have B-Corp statutes, it is not clear whether courts would respect the company’s decision to designate generating a public benefit as in the best interest of the company. Of course, a company can avoid any uncertainty by organizing in a state that recognizes the B-Corp. Because the B-Corp is a recent development and the law surrounding it is in flux — indeed, there may be no legal precedent covering it in many states — great care must be taken by entrepreneurs seeking to establish B-Corps.

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