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Legal • Posted on: Jul 15, 2014

B Corps vs. Benefit Corps – What’s the Big Difference?

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B Corps and benefit corporations – these terms are often used interchangeably to refer to mission-driven, for-profit businesses. In actuality, though, a B Corp and a benefit corporation are two different things. To understand the difference, a little context is important.

In 2006, Jay Coen Gilbert, Bart Houlahan and Andrew Kassoy founded a Philadelphia-based 501(c)3 organization called B Lab, with a mission to “redefine success in business.” To go about doing that, they first created something called the B Impact Assessment in 2007. The B Impact Assessment serves as a standard for measuring a business’s social and environmental impact and as a means of benchmarking a company’s impact compared with that of similar businesses. The assessment also includes interactive tools to help businesses improve their impact over time.

In 2008, B Lab started certifying social enterprises (mission-driven, for-profit companies) as “B Corps.” To become a B Corp, a business must achieve a score of 80 or above (out of a possible 200) on the B Impact Assessment and change its governing documents to allow directors to consider other stakeholders besides shareholders when making decisions on behalf of the company. Since launching the B Corp certification program, B Lab has certified over 1,000 B Corps all over the world.

While B Lab worked to certify businesses as B Corps, they also worked toward a more ambitious goal: to create an entirely new legal entity for social enterprises. In 2010, they succeeded, working with members of the Maryland state legislature to pass the first benefit corporation act. The act enabled entrepreneurs to incorporate as a benefit corporation, a type of business entity based primarily on existing corporate law, but with a few twists.

Benefit corporation status offers social entrepreneurs two specific legal advantages. First, it expands the fiduciary duty of the corporation’s directors, requiring them to consider the creation of a positive social or environmental impact, in addition to profits, when making decisions on behalf of the company. It also reduces startup costs by providing attorneys with a standardized and easy-to-understand means for structuring a social enterprise.

Benefit corporations also offer certain marketing advantages that other legal structures don’t. When structured as regular corporations or LLCs, mission-driven businesses often find it difficult to communicate their social or environmental missions. Benefit corporation status provides entrepreneurs a way to cut through the noise of the purely for-profit marketplace and makes it easy for consumers to identify and patronize social enterprises. Also, because this new type of business entity ensures a high level of standardization from company to company, consumers who understand what it means to be a benefit corporation can comfortably make assumptions about the operations of benefit corporations across different sectors.

Benefit corporations also work toward ensuring that mission-driven businesses are held accountable and operate transparently. Benefit corporations must file annual reports detailing their positive social or environmental impact. This fosters more transparent business operations and helps to protect the nascent social enterprise sector from companies that “greenwash” – businesses that are not social enterprises but claim to be in order to increase their profits or generate some other self-serving benefit. While some may see the reporting requirements of a benefit corporation as onerous, most benefit corporations see them as an opportunity to tell the story of their company’s positive impact on society or the environment. A great example of one such company is Greyston Bakery, whose annual benefit report you can find here.

Benefit corporations are recognized as legal business entities in 26 other jurisdictions across the country, including Arizona, New York, Louisiana, Massachusetts and South Carolina. While most states have similar benefit corporation statutes, there are some that stray far from the “Model Act” first passed in Maryland in 2010, like Colorado and Delaware. Some states have made small changes or upgrades to the Model Act, including Connecticut. As of now, Connecticut is the only state that offers the option of “legacy preservation” to social entrepreneurs who want to ensure that their company, or its assets, will be used to create a positive social impact after they leave the organization or if ownership is diluted.

To sum up, while it’s easy to refer to a benefit corporation as a B Corp, or vice versa, be careful not to conflate the two different concepts. Yes, a benefit corporation can be a certified B Corp, but it doesn’t have to be, especially if the founders of the company can’t afford the certification from B Lab. Likewise, a B Corp can be a benefit corporation, but it could also be an LLC, a regular corporation, a limited partnership or another type of legal business entity.

My advice – be specific when you talk about businesses that are B Corps or benefit corporations. If you’re looking to abbreviate “benefit corporation,” try calling it a benefit corp instead. And, now that you’re an expert on the difference between the two concepts – explain them to a friend, or send them this article!

You can also see an infographic on the differences here.

About the Author 

James Woulfe is public policy and impact investing specialist at reSET, the Social Enterprise Trust, a nonprofit organization whose mission is to promote, preserve and protect social enterprise as a viable concept and a business reality. You can contact James at Jwoulfe@socialenterprisetrust.org.

 

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