B Corps vs. Benefit Corporations: Understanding the Key Distinctions

B Corps vs. Benefit Corporations: Understanding the Key Distinctions

The terms “B Corp” and “Benefit Corporation” are often used interchangeably in common parlance, but they have distinct legal meanings. A number of prominent brands including Patagonia, Lemonade, Ben & Jerry’s, Warby Parker and Kickstarter have attained B Corp status. The trend of greater consumer emphasis on social and environmental purpose has led many startups to consider B Corp certification or incorporation as a public benefit corporation. Startups should understand the distinctions B Corps and benefit corporations in order to evaluate whether such status fits their company’s particular circumstances.

Key Characteristics of B Corps

B Corp is the name awarded to companies by a nonprofit organization called B Labs if they meet certain eligibility criteria and pay membership fees. Eligibility entails meeting a number of social and environmental criteria as well as performance, accountability and transparency standards. In many regards, the concept is analogous to the LEED certification for green building projects or the organic certification for agricultural products. Despite its name, a B Corp may be a corporation, limited liability company, partnership, sole proprietorship, or any other number of legal forms.

The B Lab organization created the “B Impact Assessment” for determining whether a business should qualify for B Corp status. Companies self-report how they score on various metrics that are designed to evaluate the business’s impact on society, its workers, the environment and customers. A score of at least 80 out of 200 points must be achieved on the assessment. On top of the B Impact Assessment, a B Corp must sign an “Agreement for B Corp Certification” with B Lab and pay membership fees. Annual fees are tied to annual sales revenues figures, making the certification affordable even to lower revenue startups.

Startups with less than 12 months of operations are only eligible for the “Pending B Corp” status designation. This is due to the fact that B Lab evaluates the practices and policies of a company over the prior 12-month period to make the B Corp certification determination. After operating for 12 months, an application can be submitted to become a certified B Corp. This pending status enables startups to signal to potential investors and customers their commitment to sustainable practices in the interim.

How Benefit Corporations Differ From B Corps

In contrast to a B Corp, a benefit corporation is a special type of legal entity incorporated in a state with a benefit corporation statute. Currently, over 30 states have passed benefit corporation legislation recognizing benefit corporation status. A benefit corporation must meet specific statutory requirements for the corporation and its directors. Sometimes referred to as a public benefit corporation or a social purpose corporation, the directors of a benefit corporation have a fiduciary duty to consider the implications of corporate conduct on materially affected stakeholders including employees, the public and the environment. This stands in contrast to a traditional for-profit corporation, which limits the directors’ fiduciary duties to managing the corporation in a manner that maximizes financial returns for stockholders.

Notably, a benefit corporation does not have to obtain B Corp certification, whereas a certified B Corp that is formed as a corporation is required by B Lab to become a benefit corporation provided that the state of incorporation has a benefit corporation statute. Thus, in order to remain a certified B Corp in such a state, the corporation may need to incorporate as or convert into a benefit corporation. Despite the lack of a requirement for benefit corporations to register as B Corps, they may choose to do so in order to use the familiar B mark logo. Furthermore, most benefit corporations are required to prepare and submit an annual benefit report that is filed with the Secretary of the State. The preparation by B Corps of the annual reports required by B Lab often also provides a useful foundation for completion of the legal reports mandated by the state for benefit corporations.

Delaware Public Benefit Corporation

As with traditional for-profit corporations, many businesses electing to become benefit corporations choose Delaware as the preferred forum. In order to incorporate as a Delaware public benefit corporation (PBC), the social purpose must be defined at the time the articles of incorporation are filed and the company is responsible for delivering periodic reports to stockholders that this social mission is being fulfilled. Alternatively, an existing corporation can convert to a PBC by amending its charter and bylaws. If stockholders feel that the company’s stated social and environmental goals are not being satisfied, they have the right to bring a lawsuit against the PBC. One potential challenge PBCs face is that current case law and legislation provide limited guidance on how to balance the profit mission with broader stakeholder goals.

The B Corp Stamp of Approval

B Corp status has helped trendy startups signal to customers their commitment to the public good in addition to boosting shareholder value. Lemonade, the disruptive insurance startup that offers homeowners, renters and pet health insurance, is currently the world’s only public benefit insurance company and also was awarded provisional B Corp certification. Etsy, the online marketplace for handcrafted goods, was among the first publicly traded companies to also be a certified B Corp. Ever since Patagonia became the first company in California to sign up for B Corp certification in 2012, the so-called “stakeholder capitalism” movement has extended across a wide array of industries and jurisdictions. As founder Yvon Chouinard described it when Patagonia registered to be a B Corp, “Benefit corporation legislation creates the legal framework to enable mission-driven companies like Patagonia to stay mission-driven through succession, capital raises, and even changes in ownership.”

Considerations for Investors

An important consideration for companies weighing whether to highlight their social purpose in the form of B Corp or benefit corporation status is to evaluate how such a decision may be perceived by angel investors, venture capitalists and other investor groups. Some investors may be wary of funding a company whose purpose extends beyond just maximizing shareholder returns. On the flip side, other investors are bound to find the environmental and societal aims attractive.