Traditionally, when companies did good in the world, they set up philanthropies or corporate responsibility units, or spent on “cause marketing.” Now there are more morally far-reaching options, including incorporating as a benefit corporation (a legal designation in 31 states), or applying for B Corporation status (a 50-state certification policed by B Lab, a nonprofit group). These standards safeguard workers, customers, the environment, and communities as much as shareholders, say “b-business” advocates, and signal a distaste for short-termist managerial thinking. Also, benefit corporation statutes offer some protection from people who might change a company’s social mission down the road (though the law isn’t settled on these questions).
There are now about 4,000 legally constituted benefit corporations and 2,000 Certified B Corporations, from Etsy to Warby Parker. But there’s still some confusion about the differences between the two and what each entails for companies thinking of adopting them, says Abi Barnes, author of a new guide that aims to disentangle the knots. “There is a lot of misinformation and mislabeling and self-proclaimed experts and authorities spreading that misinformation and mislabeling,” she tells Fast Company. “As an entrepreneur, I felt that it would be difficult to understand if I didn’t have a law degree.”
Published by the Yale Center for Business and the Environment and Patagonia, the social business pioneer, the guide offers a nice and clear explanation of the whole landscape of “b-business” (Barnes’s term), including the pros and cons of going ahead with either option (or both).
A benefit corporation is an incorporating structure similar to LLC or a C Corp. Such entities agree in their founding documents to take account of wider stakeholders than just their shareholders, including the environment, community, and workers. State tests of “benefit” are often quite vague, ranging from “general public benefit” to something more specific, like improving an education standard. But companies have greater latitude to pursue social goals without fear of being sued by their investors for failing to produce sufficient profits.
B Corporation certification is the “functional equivalent of Rainforest Alliance, LEED, or Fair Trade labels,” Barnes writes in the guide. Overseen by B Lab, a nonprofit founded in 2006, it challenges companies to reach 80 points out of 200 across areas such as energy efficiency, employee benefits, and corporate transparency. It doesn’t hold as much legal weight as being a benefit corporation (as we’ll see below), but it is more definitional in terms of what is required.
When companies qualify for B Corp certification, B Lab requires they also pursue state incorporation as benefit corporations where possible. In states with such laws, they need to apply within two years of becoming B Corps. If states have passed statutes only recently, they have four years generally to comply.
Setting up as a benefit corporation is relatively straightforward (see a useful guide here). The fee is $70 to $200, plus legal costs (hiring a lawyer is advisable, it says). Benefit corporations need to change their bylaws to reflect their multi-stakeholder orientation, and issue an annual report. But that report doesn’t have to be verified by third-party audit or review.
B Corp certification is a tougher but more rewarding process. You need to complete a B Lab Impact Assessment, take part in an assessment phone call, provide documentation, amend articles of incorporation, and sign a “declaration of independence” (see an example here). B Corps need to have been in (for-profit) business for at least 12 months (though B Lab offers a temporary startup certification as well) and pay fees of between $500 and $50,000 each year ($500 for revenues below $2 million). And, they need to be reevaluated every two years.
There are also good reasons not to take either the certification or incorporation options. Barnes decided not to pursue either for her startup, Allergy Amulet, which makes a food allergen detection device. “I determined that it was too early for us to certify and that it was too costly at this stage to reincorporate as a benefit corporation,” she says. The difficulty of certification relates to a company’s complexity. Businesses with foreign suppliers, for example, may find it harder to collect and assure information than businesses with local suppliers.
Barnes lays out the pros and cons of becoming incorporated, certified, or both. The pros start with brand identity. “In an era of ‘greenwashing’ and misleading labels, Certified B Corporations and benefit corporations help consumers identify trustworthy companies,” she writes. B certification may make a company more economically resilient, according to B Lab (though that may be because they’re better companies in the first place). Moreover, B businesses may attract capital better than non-b-businesses–the impact investing field is growing exponentially. And they might be better at hiring and retaining good people.
The negatives are considerable too, though. B Corps have to practice what they preach and face a higher level of scrutiny than their peers. Benefit corps can expose themselves to internal activism. Shareholders owning just a 2% stake can launch “benefit enforcement proceedings” if they believe managers are failing a public benefit mission. And, social impact entrepreneurs sometimes have to justify slower returns on capital compared to their more traditional peers.
The law around benefit incorporation remains somewhat up in the air. In the event that a company receives a takeover bid, are the directors of a benefit corporation required to take the highest offer, even if it impinges on the company’s wider social mission? Standard corporate law says yes. Benefit corporation law says maybe, maybe not.
“Unlike most business entities, the benefit corporation is relatively new, and so the law surrounding these nascent structures is not well established,” the guide says. “As a result, the extent to which the B designation and constituency statutes can preserve a company’s social mission is unclear.”
The closest the question has come to be tested was back in 2000 when Unilever wanted to buy Ben & Jerry’s. The ice-cream maker could have fought the bid under a precursor to benefit corporation law–“constituency statutes” in Vermont that allow directors to consider non-shareholder interests. But, in the end, Ben & Jerry’s owners decided to accept the offer, and to become a certified B Corp instead.
We’ll have to wait until a proper case comes to trial–say, when a giant retailer tries to buy a name in “b-business”–before the law becomes any clearer. “The real legal questions will likely follow from behemoths like Walmart trying to purchase B-hemoths like Etsy,” writes Barnes.
See the full guide here.