B Corporations Explained

B Corps are a nickname for a benefit corporation: a business structure reserved for corporations that are for-profit but also make significant environmental contributions in an effort to …

B Corps are a nickname for a benefit corporation: a business structure reserved for corporations that are for-profit but also make significant environmental contributions in an effort to remain socially responsible. New York recently became the seventh state to recognize B Corps as legitimate legal entities and is expected to draw the interest of startups looking for a home as well as investors seeking more responsible investment opportunities. Although it is relatively easy to set up the structure for a B Corp, there are numerous businesses that help with the process, including Benefitcorp.net, a nonprofit public service website designed for assisting those with an interest in establishing a B Corp. For more on this continue reading the following article from TheStreet.

Beginning Friday, businesses in New York State will be able to structure themselves as so-called benefit corporations, or B Corps, a corporate legal structure that will likely appeal to businesses that are for-profit but have also made it part of their mission to contribute to environmental and sustainability efforts.

New York became the seventh state to recognize the legal structure when it passed the law in December. The hope is that by allowing a crop of socially minded entrepreneurs to structure their companies as B Corps, it will encourage more start-ups to come to New York. The move is also potentially significant given the breadth of investment capital — and those looking for socially responsible investments — that calls the Big Apple home.

The best example so far of a large company structured as a B Corp is outdoor apparel company Patagonia, which incorporated under California’s laws.

"Benefit corporations will create a new industry of corporations with a ‘double bottom line’ of profit and socially responsible practices — unlocking billions in potential investments in companies that pursue a positive material impact on society and the environment," according to New York Assembly Speaker Sheldon Silver in a Dec. 13 release.

The first state with B Corp legislation was Maryland, in April 2010. Vermont, Virginia, Hawaii, California and New Jersey have also signed on. Washington, D.C., and three more states — North Carolina, Pennsylvania and Michigan — have pending B Corp legislation, according to Benefitcorp.net , a public service Web site run by the nonprofit B Labs, which offers a third-party "certification" for benefit corporations.

Structuring your company as a B Corp isn’t much more difficult than creating any other legal structure, such as an S Corp or C Corp, but there are a few differences. The states that have enacted such laws (or that have legislation pending to do so) have not included any tax advantages, B Labs says.

A company is required to have a corporate purpose that creates a "material positive impact on society and the environment," according to Benefitcorp.net. Company directors and officers must include the interests of financial and nonfinancial stakeholders when making decisions. Companies must also produce an annual report that explains its overall social and environmental performance using a credible, independent and transparent third-party standard.

While providing hope for more socially and environmentally minded businesses, and even as more states allow the legal structure, it looks like it will be some time before companies embrace becoming B Corps.

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So far fewer than 600 companies have used B Labs’ certification requirements.

Deborah Sweeney, CEO of MyCorporation, an online document filing and research assistance service for small businesses forming limited liability companies or corporations, has seen little interest in clients becoming benefit corporations, primarily because there has been little education on it.

"Entrepreneurs are interested, but those are probably a more sophisticated group of entrepreneurs," she says. "Your base-level entrepreneur is not that familiar, and I think that the visibility of the offering of the B Corp in New York is going to raise awareness."

Companies that legally incorporate as a B Corp are not required to certify themselves through B Labs, but the nonprofit is looking to encourage more companies to do so by offering special incentives through its relationships with many small-business suppliers and services, co-founder Jay Coen Gilbert says.

The certification "provides an easy way for consumers or investors or workers to determine which company is really walking the talk," he says.

Some of the incentives include IT service and support from Intuit (INTU) and Salesforce.com (CRM), for instance. They may also get advertising perks by Sustainable Industries, CSRWire and Care2.com.

Companies may also have an easier time hiring talent. The Yale School of Management, for instance, offers loan forgiveness to graduates who work for a certified B Corp.

"What we want to do is create the legal infrastructure. The market will decide [whether] to reward those companies," Gilbert says.

One company that is a B Lab-certified B Corp and plans to file for the legal structure is Yonkers, N.Y.-based Greyston Bakery, the brownie supplier to Unilever’s (ULVR) Ben & Jerry’s ice cream.

The bakery says it strives to be "a model for inner-city business development," including hiring and training people who have struggled to find employment. Its profits fund the Greyston Foundation’s community development initiatives in low-income housing, child care, health services and technology education, it says.

"The B Corp status allows us even more transparency to consumers — that is what our business is about. We want to encourage other businesses to do it and set an example," says Mike Brady, president and CEO of the bakery.

"Without these types of actual legislation or third-party accountability standards, marketers can tell the same story," he adds. "I’m hoping the stamp of a benefit corporation has meaning to consumers, similar to the organic certification today in the food industry. While it’s not perfect, in five years we can make sustainability progress and be more transparent and accountable to making our products."

Because the corporate structure is so new, there are potential concerns, MyCorporation’s Sweeney cautions.

At least in the near term, the lack of awareness of how these companies are run may deter investors. "Investors tend to be old-school — what’s tried and true, what’s served them well. The lack of familiarity with this type of filing is going to be a hindrance," she says.

Sweeney’s company has not started offering clients the option to become a benfit corporation because they are waiting for the public to become more familiar with the topic and for more states to sign on.

Another logistical concern is the transition directors and officers may have to make in their the decision-making process to not only consider financial impact, but the impact to potential suppliers, employees and the community and environment at large.

"From a pure management standpoint it may be confusing," Sweeney says.

"Ultimately, it’s unlikely that we’ll see older, more established companies switch their legal structure to a B Corp. "It would actually be mostly applicable to new businesses that don’t have a framework anyway," she says.

This article was republished with permission from TheStreet.


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