The New Year brought a new class of corporation called a benefit corporation or B Corp, to the state of California. The new California B Corporation law allows entrepreneurs and investors to organize stock corporations that can pursue both economic and social objectives. A B Corp in California provides an alternative business setup to a traditional “C” or “S” Corporation. Before, corporations were required to prioritize shareholder profits along with their financial interests.
A business may want to give back to the community and leave a positive footprint on society, its workers, and the environment. But in a traditional “C” or “S” Corporation, one is bound by law to prioritize the financial wellbeing of shareholders, so those non-financial ideals can sometimes be lost. It’s an ethical and legal dilemma that some corporations face when making decisions about how they do business.
B-Corp In Practice
The founders of Ben & Jerry’s Ice Cream struggled between their own business model and the law during a buyout offer back in 2000. The company was offered more than $43 dollars per share, but owners Ben Cohen and Jerry Greenfield had concerns about the social conscious of the international conglomerate that made them the offer. The Vermont-based company was run on a business model that focused on their people, the planet, and profits. But the law prohibited them from selling to a company that more closely matched Ben & Jerry’s business model, because it offered them less money per share. That meant Ben & Jerry’s was required to maximize their profits for the company’s shareholders and therefore had to sell to the corporation that made the higher offer. Eleven years after the sale, the state of Vermont set up a benefit corporation structure, which could have allowed them to sell to a lower bidder that was more socially aligned with their goals for the company.
California is one of seven states in the nation to create a new form of business incorporation called a benefit corporation under, Assembly Bill 361. “With this new law, we are attracting new socially-conscious companies, investors and consumers – we’re sending a strong message that California is open for this emerging form of business,” said AB 361 author Assemblymember Jared Huffman (D-San Rafael).
Patagonia, an outdoor apparel and equipment company, became the first business in the state to file as a benefit corporation. The California based company earned $500 million dollars in profits last year, after 40 years of doing business the old way, Patagonia’s founder decided it was time to switch to the new B Corp. “In 5 or 10 years from now we’ll looking back and say that was the start of the revolution,” said Patagonia Founder Yvon Chouinard. “The existing paradigm is not working, this is the future.”
How the B-Corp Came About
A non-profit organization called B Lab sets out a series of requirements and certifies businesses that meet the standard. B Lab helped form the first pieces of legislation that has now been replicated in the seven states with benefit corporations. According to B Lab, there are 517 B Corporations that have $ 2.9 billion in revenues, in 60 industries that have saved more than $2 million dollars a year by making the switch. After forming in California, a benefit corporation can try and apply with B Lab to become a certified benefit corporation. B Lab suggests new companies wait 6 months of revenue generation or operations before they apply to for their assessment.
Another factor that distinguishes a B Corp from other corporate structures is that this new legal setup protects shareholders who believe in the benefit corporation’s mission of doing more than just making money. Shareholders retain the right to sue a B Corp if they feel that the directors are not doing enough to take social responsibility into account. It keeps pressure on a CEO or board of directors to live their mission statement with every decision they make on behalf of shareholders.
Hope Consulting found in a 2010 study that wealthy investors said they were likely to put $120 billion in potential investments into mission-driven companies or benefit type corporations.
How will it benefit my business?
By switching to a benefit corporation, a stock corporation creates a legal framework that offers it access to social impact and venture capital investments. B Corps allow legal protection for a company’s board of directors and officers, with a more defined fiduciary role of maximizing profits while also ensuring environmental and social factors.
It also creates marketing opportunities for a business to set them apart from the competition because it requires an independent third-party review of their performance. The transparency in business practice can separate a good firm from one that just uses good marketing to pitch their product.
How to start a benefit corporation?
At Top Floor Legal, we can help any business decide if a benefit corporation is the best fit for your business model. Part of making the change includes several legal requirements, like amending your governing documents (e.g., Articles of Incorporation, Membership Agreement, Partnership Agreement) under California’s General Corporation Law. In California, under UB 361, there are no tax breaks from the state for forming a benefit corporation. B Corps still pay the standard corporate income tax. Only the city of Philadelphia, Pennsylvania offers any tax incentives for benefit corporations.
Suggested Links:B Lab: A non-profit organization called B Lab sets out the requirements and certifies businesses that meet the standard.